Commodity Research - Cement & Shipping"

Madhav Equity & Research Institute (India) Pvt. Ltd.
A
PROJECT REPORT
ON
“Commodity Research-
Cement & Shipping”
Project Guide
Mr. Murali Khrisna Mandva
Submitted by:
Sidharth Vij
Roll No: 65
PGDM-II
IMDR
INSTITUTE OF MANAGEMENT DEVELOPMENT AND

RESEARCH.
PUNE
Commodity Research 0 Sidharth Vij

Acknowledgement
I am grateful to Mr. Rajesh Bhatia, Director of Madhav Educational & Research Institute (India)
Pvt.Ltd. for acknowledging my grave interest in the area of research for commodities, which is
coming to India in a big way. And therefore assigning me this internship and further letting me
choose the commodities of my own interest. I thank him for the faith he had in me for giving me
an important part of the work in his pune office and I have tried my level best to fulfill my
responsibilities.
I am also thankful to Mr.Atul Sapre, Director of my Institute for helping me clear all the doubts
that I had before taking up this project. His regular check on me ensured that I was regularly
going to the office and adding on much to my experience of the actual work place environment.
I would also like to thank Mr. Anand Sukumaran for his valuable insights on the purpose of
Summer Internship, which helped me realize the need of observing the organizational
structures, communication processes and the motivational factors in the organization.
I am especially grateful to Mr. Murali Krishna Mandva, my project guide in the pune office. His
valuable inputs helped me include the areas, which were initially not known to me, and further
his regular feedback on my work helped me compile a comprehensive report on my
commodities.
I am also thankful to other interns, who fortunately were my classmates. Detailed discussions
with them helped me clear my doubts. The sharing of important facts was done on regular
basis among all of us, which actually pushed to do a good work and acted as a motivational
factor.
And above all I owe a lot to IMDR for whatever I have learned here till now and express my
gratitude for the same.
Sidharth Vij

Contents
Executive Summary
3
About The Organization 4
Organizational Structure
8
Organizational Processes 10
Overview: Commodity Market

13
Study of Commodity – Cement

15
Study of Commodity – Shipping
32
Glossary: Industry Terms

52
Learning in the Organization

54
Bibliography
56

Executive Summary
I did my summer internship in Madhav Educational & Research Institute (India) Pvt.Ltd, a
Bombay based financial firm. Summer internship was a research project on commodities.
Commodity market is coming up in a big way in India. Therefore it was a great opportunity to do
my internship in the commodity research which is one of the latest and the hottest things in the
financial markets. In India it is still in the emerging stage and has yet to enter in a big way. My
internship involved a comprehensive study on the investment opportunities in the commodities.
I had to make a report on the cement and shipping sector.
I was there for duration of 8 weeks in which I carried a detailed research on the commodities
that were allotted to me. Basic infrastructure was provided by the company like computer,
access to the net and printing facility for the research papers. My job profile was to acquire
some basic understanding of the commodity and then carry out a detailed study of the trends
that over the period emerged in the market. This helped in knowing factors that affect the
commodity and also while the forecasting the prices.
Each of the commodities had an array of reasons that from time to time had affected their
prices. Therefore it was a tough job as the reasons ranged from political and economic. As in
the case of the shipping, it primarily depended on the international trade and the overall rate of
growth of the world economy. To give an insight demand from china, severity of winters in the
states, export policies of different countries, membership of WTO, port congestion, initiatives of
the domestic governments were some of the factors. Present happenings in that sector were
also taken into consideration. As the information about the domestic front was very scant,
library facility was used and information was extracted from journals.
After the understanding of the market dynamics of that particular sector, forecast was required
to be made on the price movements. For this all the reasons that affected that commodity is
required to be studied in the light of the macro level forecast given by numerous agencies on

the net. For the sake of reliability number of research papers were required to be studied,
which was a tiresome job. The supply side of any commodity has to be studied and along with
that demand side was also required to be studied. In the end a comprehensive report on the
research done including the forecasts. The bibliography was considered as an important input
so that organization can later refer to the sites and also subscribe to some of the sites which
provide important inputs.
About The Organization

The organization ‘Madhav Educational & Research Institute (India) Pvt.Ltd.’ has a head office in
Lokhandawala, Bombay. The organization is into two different businesses, the Foundation runs
Montessori schools, which are situated in Bombay and it has equity research firm, named as
INANI Securities, which is mainly into stock trading.
The area of education is a recent addition to the group and is known as “Tree house. It
entered into this field in the year 2002, and now the Foundation runs two Montessori schools.
Presently only in Bombay, but company has plans to increase the number of schools to twenty-
five and spread it along the western coastal line. The organization has an office in
Lokhandawala in Bombay, which house the administrative staff of the schools.
The other part is the Equity Research firm. The equity research firm is named as INANI
Securities. INANI Securities has one office in Fort, Bombay and other in Swargate, Pune.
Trading and operations is done from Bombay Fort office, which is mainly into stock trading. And
Pune’s Swargate office provides all the investment tips to the Fort office on the basis of the
research work that is carried in that office.
How The Organization Started

Promoted by Mr. Rajesh Bhatia and Mr. Vipul Shah, the organization was started in 1998. Mr.
Rajesh Bhatia a management graduate from Pune University, who had an enough experience
in the mutual fund industry and also as a fund manager, provided his expertise to Mr.Vipul
Shah a venture capitalist and both of them joined hands to start an organization. This is how
Madhav Educational & Research Institute (India) Pvt.Ltd. came into existence. The
organization initially started its operations in stock broking business in 1998 with a venture
capital fund of Rs.3 crore. Later on in 2002 the organization set up two Montessori Schools in
Bombay. Presently the whole business is valued at around Rs.40 crore.

Earlier, Mr. Rajesh Bhatia along with his colleagues had started 20 th Centaury, which was later
closed down in 1996. Mr. Bhatia was also one of the founding members of the reputed stock
broking firm Motilal Oswal Ltd. Later on he quit the organization and joined hands with Mr.Vipul
Shah to set up Madhav Educational & Research Institute (India) Pvt.Ltd...
INANI Securities: Bombay

The office is in the Fort, Bombay. This arm of the organization is into equity trading. And the
research wing in Pune provides the support activity by ways of reports. Apart from equity
trading the organization also has interests in commodity research.
The office in Bombay mainly does the trading part of equity and the office in pune is mainly into
research of equity thus helping the organization to get a clear picture on where to invest.
Therefore a lot of emphasis is given on the research part so as to help the organization invest
in profitable stocks.
Research Wing: Pune

Research is a very important activity for the organization. Therefore the schedule for the
research analyst was very rigorous. It usually consumed whole of the day from 9 a.m. in the
morning to 7 p.m. in the evening and only one holiday in the week. The approach was that of a
sector specific research and each of the analysts was given a different sector to carry out
research on. Financial data of different companies in a particular sector was studied and
thereafter a report was compiled which tried to provide tips on some companies. These
companies were seen as a profitable area to invest in. Generally companies with low profile
were researched well and seen a long term potential for the organization. I was in this office
and my schedule was not very rigorous as I had the freedom to do my work anywhere. All I
realized was that research acted as a steering wheel to guide all the investments into profitable
ventures and therefore was the backbone of the organization.
Methodology Followed: Equity Research

The first aspect of the methodology was to select the sector in which research is to be carried
out. This was done by observing the trends in the industry, the market conditions and the
macro environment. Seeing the volatility of the markets, selection of the sector was a risky and

a tricky part as there was no guarantee that the sector selected is going to perform well in the
future. Thus, this aspect required a lot of study. Taking an example, if the budget is good on the
infrastructure development plans, some housing initiative plans for poor and road development,
then it signaled that the cement industry is to be benefited and this can be further bettered by
timely monsoons so that there won’t be any halts in construction activity due to unexpected
rains.
Once the sector was selected, leading and mid-cap stocks of that sector being traded both in
Bombay Stock Exchange Ltd (BSE) & National stock Exchange (NSE) were studied. And a
thorough report on that sector is made to have a clear understanding. These two activities give
a clear idea about the sector and where it is heading. Also the top ranking stocks will be
identified. This is done because normally most of the weightage is given to the top ranking
stocks, which decide the trends and the future movements in the sector.
The researches on the stocks are carried out in a methodical manner:

 The first step involves the selection of stocks. After a thorough screening of all the
stocks the research team will zero in on 5 or 6 stocks, which their study shows will
perform well.
 Once the stocks have been selected the aspects like its prospects for the growth, its
earning parameters are studied. Mostly the tools that were used came under varied
topics of subjects related to the finance like risk and return, P/E ratio, IRR, discounting
of future cash flows. These were used to arrive at the net present value of the
investment that were being considered. Based on these studies a fair estimate
projection is made for either 3 or 5 years.
 The last stage is recommendation of the stocks selected to the trading team based in
Bombay along with the data backing the selection. The Trading team then invests in
these stocks selected.
The entire process is carried out in a discreet manner as the tips concerning stocks if
leaked outside will cause a rally in the price prevailing and the whole investment activity will
get affected.
Methodology Followed: Commodity Research

This is an upcoming area in Indian market, where there is a lot of potential. Organization is
eyeing this area as a future potential and therefore started this research work just to get some

insight into this field. Presently the organization is not into commodities and I got to know that
all the interns were the first in this organization to carry out any research in this area.
Just to make things comfortable to all the interns, a briefing was given to all by Mr. Rajesh
Bhatia regarding what is to be done and what is required from all the reports. In this case a
certain commodity is taken and its price trends over the recent past are studied. Mostly
commodities require studying of the past data of several years because it gives a wide
spectrum of reasons that have affected the prices of a particular commodity at different
occasions. In all a comprehensive study of price fluctuations gives a wider understanding of the
inter-relation of the different factors that affect any commodity.
After studying the reasons for the price change and based on the evolving economic conditions
forecast of the prices of the commodity for the next year or so is made.
Here as the organization does not directly indulges in the commodity trading, commodity
research serves equity research as the price fluctuations of the commodity largely guides the
stock prices of the stocks of the companies that deal in these commodities.

Organizational Structure
Madhav Educational
&
Research Foundation
Fort Office Pune Office

Trading Wing Research Wing
INANI Securities Montessori Schools

Equity Research & Trading Arm Educational Field
Summer Trainees

Thus Madhav Educational & Research Institute (India) Pvt.Ltd. serves as an umbrella
organization for the two businesses:
1) Montessori Schools
2) INANI Securities
Montessori Schools:
As this field is recent addition to the organization in comparison to its other activity, it hasn’t
spread to any other part of the country till now. The administrative office is in Bombay
Lokhandwala Complex. It has till now about 12 teachers and 6 other people in the
administrative staff. In all, this arm has a force of around 20 people.
INANI Securities:
Inani Securities is actively into equity trading and research activity. It has two offices – one in
Bombay (Fort) and the second in Pune (Swargate).
Bombay Office (Fort) employs ten people for stock trading and this offices work in generally
taken care of by Mr. Vipul Shah.
Pune Office (Swargate) employs four people are employed who the research work. Normally
Mr. Rajesh Bhatia pays visit to this office but not very regularly. One attendant is also there to
take care of all the requirements of the office. All the summer interns also worked in this office
and made there reports.
My work during the internship primarily constituted a detailed research on the commodities.
Therefore the domain of my work was limited to the Pune office, which is the research wing of
the Madhav Educational & Research Institute (India) Pvt.Ltd.. Therefore I was in the Pune
office throughout my internship. The reports from the Pune office were sent to the INANI
securities and based on the inputs provided in the reports the trading was done.

Organizational Processes
Madhav Educational & Research Institute (India) Pvt.Ltd. being a proprietary concern had
autocratic structure. The nature of the work which is mainly related to stock broking and related
activities requires the number of employees to be less so that secrecy is maintained. The total
number of employees in both the arms of the organization is only 34 (20 in the schools and 14
in INANI investments apart from the two directors). As the activity in which the organization is
involved requires taking huge amount of risk, the autocratic setup really favors the structure.
Although the employees are given the chance to air their opinion the final decision is always
with the director. This behavior is not limited to this organization and is prevalent in almost all
organizations. The workload for the research wing was enough to ensure that they are
adhering to the processes.
Decision Making Role

As I mentioned in the beginning that it had an autocratic structure. The decision making role
was largely confined to the directors and Mr. Rajesh Bhatia has the larger say. This I think was
largely due to his expertise in this area. Mr.Vipul Shah was all the time disinterested in the
briefings that were given to the summer interns. He had initially come with the investment when
the firm was set up. During my summer internship I never saw him intervene any of the
discussions and decision making concerning the job profiles allotted to us. This gives me a
view that he has lesser role in the decision making process. Everything related to our internship
was taken by Mr. Rajesh Bhatia and he was the on who allotted us our commodities. This was
same in the case of the other four employees in the pune office. Mr. Rajesh Bhatia was the one
who did the talking part. Many times I felt that he is perfectly suited for the thing he is doing
because he had the inter-personal skills and also good network to get the insider information.
This was one of the reasons why he didn’t come to the Pune office regularly.
Communication Process In The Organization:
Commodity Research 10 Sidharth

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Directors being at the top of the structure were the superior authority and they only coordinated
the two offices – Bombay and Pune together. There was no interaction among the employees
of the different offices. Though among the four research analysts there was a healthy
communication and the sharing of some important facts was done on a regular basis. The link
between the trading office in the Bombay and Research office in Pune was Mr. Rajesh Bhatia.
Regular exchange of mails was done between the directors and the research analysts, as
directors shared a common password.
I also went to my home for some time in between as we were given the freedom to carry the
research at place of our comfort. While I was there I had a regular communication with my
project guide. I used to forward him my reports on which he used to give me his feedback and
also some comments. The feedback was given by him regularly and without any wastage of
time which helped completing both the commodities on the time.
Directors
Mr. Rajesh Bhatia & Mr.Vipul Shah
Bombay Office staff Pune office staff
The stock trading team The research team of 4

of 10 people people
There is no direct communication between both the offices, whereas if we see the kind of work.
The Pune office provides support to the trading wing or we can say that it provides the inputs
on the basis of which the investment is done. Though there is exchange of information but not
directly which is dependent on the directors. This kind of a communication is liable to distort the
information, but here the onus lies on the directors as they are the promoters they can filter the
information. This filtration can help in bringing valuable inputs from experienced directors and
omitting the information which can lead to wrong investments. And there is no attempt made to
stabilize the relations between these two offices. Such an act would reduce their dependency
on the directors and would have increased their efficiency level.

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Motivational factors:
The level of autonomy given to the employees is minimal so this limits the motivation to a low
extent. Apart from the pay – which is in confirmation with industry standards there are no other
motivational factors. The office in pune houses only the research team and an office assistant.
Mr. Rajesh Bhatia visits the office only once in a while. During my eight week internship, he has
never once come to the office to meet his employees. All the communication between them is
carried out either through telephone or E-mail. The team in pune mails their periodic reports
every week. Thus it was clear that the level of interaction between the Directors and the
employees were minimal. I don’t know about the feedbacks that the research team gets from
the directors. These feedbacks can also act as a motivational factors some times.
The briefings that Mr. Bhatia used to give were also very motivational. He used to bank upon
the money that is there in this profession and also mentioned that “you make money for us we
don’t have any problem sharing that with you”. He also used to ask all the interns a question
that when would each of like to own a Mercedes. These acted as a motivational force and
provided zeal to do the research seriously with an intention to learn and value addition.
My interaction with my project guide motivated me to a good job. Initially he was to the point but
later he started telling me what was required from the reports and what all I was missing upon.
When I started with the research I found it very boring, at that time the guide really helped me
out by telling me the approach I should follow and to give some time to it before it gets really
interesting. That was one of the factors that helped me completing my report.
Two of the members of the research team in the pune office joined during my internship. I
expected an induction program to make them familiar with the organization. Also I expected
one or both of the directors to be present there during the joining of their staff, to brief them.
Strangely there was no induction program worth naming and both of the directors were absent
that day.

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An Overview: Commodity Market
The commodity market has existed in India since 1800’s, but the vibrancy that we see today
comes from the derivatives market. Derivatives are securities like options or futures who derive
there value from the underlying asset. To make it simple, for example a farmer who grows
wheat can enter into contract with a trader to supply say 10 tons of wheat at a given price at
some future date, when he harvests his crop. Now the contract is traded and the fluctuations
are there seeing the conditions that can affect the crop of wheat. May be there can be a
drought which increases the prices of the wheat or may be a bumper crop which can bring the
prices of the wheat down. In simpler terms, it is equivalent to paper trading of standardized
commodities. Since early 2003 a number of government initiatives like opening of multi-
commodity exchanges has helped commodity trading in a big way.
The commodity market is still in its infancy in India, but it is a full fledged in the developed
countries. Commodity trading first started in an organized manner in United States, to be more
precise in Chicago. The prime exchange during that time was the Chicago Mercantile
exchange. Even now it holds a respectable position when it comes to commodity trading.
Globally the size of the commodity market is twice the size of equity market. Unlike the equity
market which follows volatile price fluctuations, the price movements in the commodity market
are largely steady and almost always have a credible reason for the price fluctuations. Looking
at the potential of such a market we can see that commodities are going to be in short supply in
the future. For e.g. consider the commodity wheat. The increase in wheat is in no way going to
be on par with the population increase. Thus it can be safely assumed that the price of wheat is
going to rise in the future. But there are also some other factors which affect the price
movements, like the introduction of new fast yielding seeds, efficient methods in harvesting and
such. But more or less the price movements are guided by the basics and because of this
reasons large amount of volatility is absent.
Mainly the trading in the exchanges happens in future instruments. Here two partied enter into
a contract which specifies the exchange of commodity for a specific prices a set future date.

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Such instruments are then traded in the exchanges. Although future trading form a big part, of
late spot trading has also been in the rise. But still their share in the overall share is small.
Condition in India:
Although the commodity trading in India dates back to 1800’s it was not until the 90’s
and the present decade that it became for organized. In 2003 govt came out with a slew of
initiatives like opening up of multi-commodity trading exchanges and the like to facilitate the
commodity trading. In India the major exchanges that indulge in commodity trading are National
commodity exchange (NCX) and multi commodity exchange (MCDX).

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Study of the Commodity: Cement
Industry Profile
Cement industry is a highly capital-intensive industry. A green field project for 1 MT requires
capital expenditure to the tune of Rs 3 bn (2 MT is an ideal size for a company to have some
kind of economies of scale). The sector operates with a high level of fixed cost (maintenance
cost is around US$ 5 per tonne annually) and therefore volume growth is critical. Access to raw
materials (limestone and coal) and consuming markets are equally important in the long term.
Let us throw some light on the various operating parameters presented in the flow chart above:

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Operating profits
The operating profit of a cement company is nothing but the difference between the revenues
earned and the expenses incurred. Revenues generated, is a function of volumes i.e. the
quantity of cement sold multiplied by the price realizations.
Volumes
Cement selling, which was previously a 50 kg bag affair only, is now also being sold in the
form of bulk cement as well as RMC (Ready Mix Concrete). Bulk cement (selling of cement in
specially designed rakes) is especially useful for regular users of cement such a builders of
large housing projects, as it ensures a continuous supply of pure cement, not touched by
human hands.
RMC, on the other hand is a factory made concrete and a value added product that can be
used for large construction projects, thus obviating the need to make concrete on the site and it
also leads to quick delivery of fresh factory made concrete. However, these modes of selling
still have a long way to go before making any impact and as a result, the majority of the cement
(over 70%) is still sold in bags.
The cement industry in the country is entirely domestic driven. As a result, exports account for
very small percentage of the total cement off take in the industry. So, here focus is on domestic
factors. As far as the demand is concerned, more than half of the demand for cement comes
from the housing industry. Infrastructure projects such as highway construction and
construction of flyovers and ports also contribute towards the demand for cement. Moreover,
certain calamities such as war and earthquakes can sometimes provide a short-term boost to
the demand for cement in the country.
Apart from these external triggers, the company’s strategy of locating its plants and the level of
competition also has a bearing on the quantity of cement sold. Since cement demand is closely
linked with the economic development, companies that have plants in regions of high
urbanization and industrialization are better placed than their counter parts. Also, the larger the
number of players, the more difficult it would be to grab a larger pie of the market share.

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Realizations
Among the different factors that affect the realizations of a company, the demand-supply
mismatch is the most important. The cement industry in the country has not been able to
realize its full potential mainly on account of the high demand supply mismatch in the country.
In FY03, the excess capacity in the country stood at more than 30 m tonnes and this resulted in
the prices touching an all time low. This, more than anything, highlights the importance of the
demand supply mismatch in the fortunes of the industry.
The level of fragmentation and competition also play an important role in determining the prices
since the larger the number of players, the more difficult it would be to ensure stability in prices.
Institutional sales or big government contracts are normally won through bidding and this can
also help determine the level of prices for specific projects. Lastly, cement like any other
commodity business is cyclical in nature and hence its realizations also depend upon the
position of industry in the business cycle.
Expenses
Capacity utilization
Since the industry operates on fixed cost, higher the capacity sold, the wider the cost
distributed on the same base. But one should also keep in mind, that there have been
instances wherein despite a healthy capacity utilization, margins have fallen due to lower
realizations.
Power
The cement industry is energy intensive in nature and thus power costs form the most critical
cost component in cement manufacturing (about 30% to total expenses). Most of the
companies resort to captive power plants in order to reduce power costs, as this source is
cheaper and results in uninterrupted supply of power. Therefore, higher the captive power
consumption of the company, the better it is for the company.
Freight
Since cement is a bulk commodity, transporting is a costly affair (over 15%). Companies,
which have plants located closer to the markets as well as to the source of raw materials have
an advantage over their peers, as this leads to lower freight costs. Also, plants located in

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coastal belts find it much cheaper to transport cement by the sea route in order to cater to the
coastal markets such as Mumbai and the states of Gujarat and Tamil Nadu.
On account of sufficient reserves of raw materials such as limestone and gypsum, the raw
material costs are generally lower than freight and power costs in the cement industry. Excise
duties imposed by the government and labor wages are among the other important cost
components involved in manufacturing of cement.

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Key Success Factors

Competitive forces in the Indian cement industry have forced it to take internal steps and
manage external control factors as well. The internal measures include making changes in
process technology, achieving higher economies of scale through higher capacities, and
implementation of technological innovations/process improvements for increasing operating
efficiencies. The external measures include taking effective steps to manage critical issues,
with external variables—such as, coal, power and freight—affecting operations.
Following are the key issues that decide the profitability of a cement company:
1. Location:
Cement being a high bulk and low-value commodity, outward freight accounts for close to
one-fifth of the total cost. In addition, for every tonne of cement produced, close to 1.7
tonnes of raw material (including coal) have to be transported. In this scenario, the location
of a cement plant assumes crucial importance. While deciding on the plant location, a
trade-off has to be made between proximity to raw material sources and nearness to the
consuming markets. A split-location cement plant can be a good compromise between the
two options. Besides these, there are other locations issues such as logistics (evacuation
of cement by rail, road or waterways), power availability in the region, and availability of
materials (limestone, coal, slag, etc).
2. Energy Efficiency:
Energy (coal and power) accounts for over 32% of the total cost of cement production and
is the single largest cost component. The issue here is the technology used (dry versus wet
process), fuel efficiency (efficient use of coal/lignite/any other material used for burning)
and power efficiency (power availability, unit power consumption, cost and availability of
captive power). The most efficient cement companies can achieve power consumption of
less than 90 kwh/tonne and fuel consumption of less than 800 kcal/tonne. The scope for
cost reduction through better energy efficiency may now be limited for better performing
companies since they have already reached the best feasible levels. However, for new
companies, the issue of energy efficiency will always be very important.

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3. Size:
As in the case of any commodity industry worldwide, economies of scale are becoming
important in the cement industry as well. With the consolidation of capacities, the top five
companies currently account for 48.5% of the total industry capacity. A green-field cement
plant is viable today only with a capacity of well above 1 mtpa. Acquisition of existing
cement companies (especially when they are available at cheaper valuations), rather than
setting up a new plant, is the preferred mode of growth now.
4. Access to Capital:
There are no apparent entry barriers in the cement industry. But as has been witnessed in
the past, the entry of new players is getting restricted. During the last five years, only four
new companies, namely, Prism Cement, DLF Cement (now Ambuja Cement Rajasthan
Limited), Indo Rama Cement (grinding unit) and Binani Cement, have added capacity of
5.9 mtpa (17% of capacity addition) out of a total capacity addition of 34.5 mtpa during the
period. The rest of the capacity addition has come from existing players.
Since the capital intensity of a new cement project is high, access to capital has become a
significant entry barrier. Existing players have managed to access capital either through strong
accruals during the boom years (pure cement companies like Gujarat Ambuja, Madras Cement)
or through cash coming from other businesses (diversified players like Grasim, Indian Rayon,
Larsen & Toubro).

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Indian Cement Industry: Past

While the consumer price index has appreciated almost 55% over the last seven years, the
cement prices in the country have in fact suffered a fall of around 6% in the same period. Thus,
the reason why the industry was going through troubled times becomes evident. High level of
fragmentation and increasing demand supply imbalance can be considered as two of the main
reasons behind the same.
Simple economics tell us that a large number of players are good for the industry so that no
one can exert a control over prices. But it also adds one caveat that for this to happen, the
markets should be highly efficient. In other words, everyone should have an access to same
resources and the laws should strictly be adhered to. Unfortunately, this is not the case with the
Indian cement industry where power thefts and tax evasions pervade the corporate system. As
a result, the smaller players, which are not that much in the public eye, are in a position to
under cut their bigger counterparts and thus keep the prices depressed.
Therefore in order to find a solution to such menace, consolidation, where bigger players have
a certain degree of control over prices, becomes imperative. Indian cement industry had a
spate of acquisitions by the bigger cement companies in recent times, (Grasim’s acquisition of
Indian Rayon and L&T’s cement business, Gujarat Ambuja’s acquisition of DLF Cements and
Modi Cement, ACC’s acquisition of IDCOL’s cement division, Lafarge’s acquisition of Tata Steel
and Raymond’s Cement business etc). Top seven players accounted for nearly 52% of industry
capacity in FY00, currently they account for 62%. As is evident from the trends in the
developed markets, increased consolidation leads to healthy prices and therefore with further
consolidation in the domestic market, prices are likely to turn remunerative in the coming years.

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Apart from low levels of consolidation, frequent capacity additions have also been responsible
for sorry state of cement prices in the country. To make things a little clearer, the total capacity
additions during FY01 and FY02 amounted to a huge 26 m tonnes, with 17 m tonnes accretion
during FY02 itself. Contrast this with FY97-FY00 period, where a lesser 20 m tonnes of
capacity was added, that too in a span of 4 years. Sales tax incentives given by some state
government for a limited period were largely responsible for such rampant capacity additions.
This led to a scenario where supply grew at a faster pace than demand and caused a
downward pressure on the prices.
Government is the single largest buyer of cement. Historically, in the last year before
elections, drive to complete pending infrastructure project has driven demand growth. One of
the major cement consuming projects is the Golden Quadrilateral Project- 5,846 km(Completed
so far 2,500 km), North-South & East –West corridors 7,300 km. (Completed so far 1,400 km).
At roughly 3,000 tons per km, assuming 50% of roads to be concrete (rest coal tar); it will
require about 10 million tons over the next two years. Besides construction and modernization
of four airports and two seaports will boost demand for cement. Besides, the industry has been
witnessing rising cement demand on account of a boom in the housing sector. Interest rate for
housing finance has plummeted from around 15-16% p.a. to 7.75-8% p.a. Also real estate
prices in major and mini metros have been stable for last two years. This has led to a huge
demand for housing units. Last year, housing finance disbursed was around Rs650bn to
finance some 5 million units. Traditionally housing, infrastructure and industrial construction
have accounted for 55%, 25% and 20%, respectively of total cement demand in the country. In
the recent past, housing sector is estimated to have accounted for 70% of cement
consumption.
However, things seem to be improving. No significant greenfield capacity was added during
FY03 and FY04. As a result while demand grew, supply almost remained constant and this
helped in reducing the demand supply gap and eased off some pressure on the prices. In fact,
prices have already improved by around 5% in the March quarter and are expected to rise
further in the coming years.

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Indian Cement Industry: Present

India is the 2nd largest cement producer in the world accounting for a share of approximately
6% of the global production. The leading players in the Industry include ACC, Birla Corp.,
Century Textiles, Grasim Industries, Gujarat Ambuja, Jaypee, India Cements, Lafarge, Madras
Cements, Ultratech Cemco (earlier L&T’s cement division, now a part of Grasim), among
others. The total installed capacity is approximately 150 mn. tonnes and the industry operate at
approximately 80% of capacity. The industry has witnessed increasing consolidation in the last
few years and currently, the top 5 players control approximately 50% of the industry capacity.
Historically, the fragmented structure of the industry coupled with a surplus position and rising
costs had resulted in pressures on margins of the cement majors. However, increasing
consolidation and relatively better demand supply position has resulted in firm prices during the
last several months. This has had a positive impact on the performance of the cement
companies in the recent past. Sharp growth in exports has also helped the cement companies.
However, cement is a heavily taxed commodity and the tax incidence is almost 30% of the
sales realization. Also, while cement companies in India are increasingly focusing on improving
productivity and enhancing cost control, rise in external cost elements (primarily power & freight
costs) continues to remain an issue.
The cement industry performance is also linked to the growth in the end-user industry (roads,
housing, other infrastructure projects) and any initiatives on this front is likely to have a positive
impact on the earnings growth of the cement companies.
Some link-ups of the Indian cement industry:
 Demand for cement is closely linked to the economic activity – especially infrastructure
and housing boom: So the initiatives taken by the government are of critical importance
to the cement industry. Like budget, has direct impact on the construction and housing
boom and initiatives taken by government towards the development of the
infrastructure.

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 Monsoon has a great relevance to the Indian cement industry. Deficient monsoon can
leave the agricultural sector starving which in turn affects the demand of the rural
sector for cement. Typically, July – September quarter is slack for the industry because
of monsoon. During monsoon, construction activity comes to a halt. Transportation of
cement also gets impacted as cement binds on contact with moisture leading to
wastage. And if India receives extended monsoon then also the construction activities
come to a halt and thereby affects the cement industry.
 Diwali is the biggest festival in the Hindu calendar, during which most people take
holidays and all construction related economic activity gets impacted. Rather the
festive season affects the demand for the cement because the economic activity slows
down when people take holidays and construction sector comes to the halt.
 Apart from these factors the regional imbalances affect the Indian Cement Industry.
Indian Cement Industry is viewed in terms of different regions i.e., Northern, Southern,
Western, Eastern Region. As freight element forms a major part of the cost structure
regional presence in terms of proximity to the markets or the raw materials can work to
the advantages of different players.
The Indian cement industry has to be viewed on a regional basis viz. northern, western,
southern and eastern. Since demand is unfavorable in certain regions, cement companies that
focus on these regions are affected if there is a decline in prices. The Indian cement industry is
also highly fragmented with the top six accounting for about 60% of industry capacity. The rest
40% is distributed among 40 small players. The cement industry in India has emerged as the
second largest in the world, boasting of a total capacity of around 150 m tonnes (including mini
plants). However, on account of low per capita consumption of cement in the country (110
kgs/year as compared to world average of 260 kgs) there is still a huge potential for growth of
the industry.
As is seen from the graph below, 55% of the demand for cement comes from the housing
sector. This sector has witnessed rapid growth over the past few years. Housing loan
disbursals, which can be considered as good indicators of growth in the industry have grown at
a CAGR of 30% over the last three years. With a shortfall of 19 m dwelling units in the country

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and disbursals expected to grow at a similar rate for at least the next 3 to 4 years, the demand
for cement from this sector is likely to grow unabated.
It is no coincidence that China, which has emerged as the fastest growing nation in recent
times, is also the largest consumer of cement. While the country accounted for 25% of world
GDP growth in recent years, around 40% of the cement consumed in the world is accounted for
by China, mainly to create world-class infrastructure and ensure rapid urbanization. Therefore,
if the Indian policy makers have to put the country on a high GDP growth trajectory, sizeable
investments in infrastructure will have to be made, thus boosting the demand for cement. With
the government going in for 25% concretization of roads, the construction of highways and rural
roads cris-crossing the country is likely to translate into higher demand for cement.
Times Ahead:
The Cement Cycle: Where Is It Headed?
Though a cyclical commodity, cement is a proxy for overall economic growth. That explains
why the industry has been growing at around 1.2 times India's GDP growth rate in the past.
With GDP growth expected to remain high (6-8 per cent) over the next few years, the cement
industry should grow at an average of 10 per cent. However, this growth may be sporadic (very
high growth in one year and smaller growth or even negative growth next year). On the supply
side, drives to enhance capacity will be based on long-term demand projection.
The cement glut of early 2000s won't be repeated again. With demand continuing to zoom and
no big Greenfield projects coming up (it takes around two years for a plant to be
commissioned), the gap between supply and demand is fast reducing.

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Cement is intrinsically linked to the growth of the economy and more importantly, growth of the
infrastructure sector, which largely depends on the political stability and will. Any slowdown of
the economic growth or infrastructure growth would have an impact on the demand of cement.
Cement is a low value, high volume product where transport forms a major part of the cost,
both on raw materials as well as on finished product. Most of the costs concerning transport
either by rail or by road are governed by government policies. Any increase in the freight cost
will affect the profitability of the company.
One of the major input costs is coal. The supply of all indigenous coal is under the control of
the central government. Any increase in the prices of the coal will affect the bottom-line of the
company.
Per Capita Consumption:
In the view of industry people, the cement business is a great business to be in. Giving an
overview of the sector, Mr. Birla commented that India has enormous potential for growth, given
the lower per capita consumption of only 110 kilos against the global average of 260 kilos at
present. The per capita consumption of cement in India is perhaps the lowest in South East
Asia. In Thailand it is 293 kilos, China — 429 kilos, Malaysia — 529 kilos, and in South Korea
— 951 kilos. India thus offers a tremendous growth opportunity given its lower per capita
consumption.
The rise in per capita consumption would be fuelled by the strong growth in the housing sector
and the government's thrust on infrastructure development. This will propel a robust volume
growth.
2004-05 at a Glance:
The upturn of the Indian cement industry is to continue. The latest evidence that the cement
industry has a bright future comes from the entry of the world’s second largest cement player,
Holcim of Switzerland, six years after the world’s leading company Lafarge came to India.
The industry has been faring well this year. In the first nine months of the current financial year,
the 150 million tonne per annum industry clocked a growth rate of 8 per cent in dispatches.
With almost no fresh capacities coming up in the next couple of years, the demand-supply gap
can only become narrower.

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Executive director, the Associated Cement Companies (ACC) says “Looking at the rate of
demand growth in the last few months of this year, the industry is poised for good growth in the
coming months. If the economy continues to grow at this pace, the next year will see
dispatches grow by around 9 per cent.”
In the last six months, demand in north India and in east India will drive growth. Executive
director of the Rajasthan-based Shree Cement, M K Singhi says “Demand growth in the north
has been in the range of 8-10 per cent in the last few months and we expect this to continue.
Also the Commonwealth Games in Delhi in 2008 will further push demand.”
The buoyant eastern market has encouraged Lafarge India to increase capacity. After six years
in India, it is looking at ramping up capacity by around 2 - 2.5 million tonne per annum, to take
its total capacity to 5 million tonne per annum in the next couple of years.
Analysts also say that the demand-supply gap in the western region will fall significantly this
year. “The construction boom in the Middle East will continue right through the next financial
year and companies based on the west coast will benefit from increased exports. Also,
because of material being diverted to export markets, there are fewer chances of an oversupply
situation in the western region.”

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Outlook
The cement industry recorded a growth rate of 7.8% for 2004-05. The growth momentum
witnessed in the second half of 2004-05 is expected to be sustained in the current year with the
continuing focus on housing and infrastructure sectors. The expected demand growth of
around 8% with no new significant capacity addition in the pipeline is expected to lead to stable
to improved cement prices.
Industry demand slated to grow by 8% p.a.

Cement industry is poised for a healthy growth buoyed by the following underlying factors:
GDP growth of 7%
Growth in the cement industry has a correlation of about 1.2X with GDP growth. With the Indian
GDP growing at the rate of 7%, the cement industry is also expected to grow at the rate of 8-
9% for the next 2-3 years.
Infrastructure spending on the rise

Infrastructure spending in the country is on the rise. The government has undertaken various
initiatives for the development of roads, railways, ports and power. With the various projects
being implemented, the demand for cement is bound to increase in the future. Given below is a
list of the various programmers undertaken by the government:

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The Golden Quadrilateral and the National Highway Authority of India’s (NHAI) East-West
corridors are likely to be completed by December 2007. The aggregate cost estimate for both
the projects, covering 13,300kms, is about Rs540bn. The Cement Manufacturers’ Association
(CMA) has been lobbying with the government to lay a significant part of the roads in cement
concrete. Thus, even if 25 per cent of the roads of East-West corridors are laid by concrete, it
will lead to an incremental demand of 5-6mn tons of cement per annum. Likewise, the Golden
Quadrilateral is also likely to add up 4-5mn tons of demand per annum.
Boom in the housing sector

Demand in the housing sector is expected to remain robust for the next few years. Factors like
low real estate prices, tax relief against interest cost on housing finance, stable interest rates,
increasing competition in housing finance, and availability of housing finance for duration as
long as 30 years are the positives behind this. Rural housing is also likely to see increased
investment due to higher rural income on back of good monsoons last year.
The housing finance industry has estimated a latent demand of 33mn houses and forecasts a
growth of 50% pa for next 4 years. Just 5 years ago, in 1998, the government used to account
for 50% of total demand, industrial sector used to account for about 25% of total demand and
housing sector was only 25% of total consumption. Now, the ratio has changed significantly
and housing accounts for the about 50% of total consumption, where as government and
industrial sectors accounts for 25% each.

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Cement supply stable at current levels

The country added about 20mn tons of cement production capacity between the period 2001 to
2003. Major players in the industry are not planning significant capacity addition for the next
two years. Considering the gestation period of setting up a cement plant is of about 12-18
months, additional supply from new capacities if any will arrive only from FY06 onwards. For
the next couple of years thus, increase in cement production will be fuelled only by increase in
percentage of blended cement.
Increasing consolidation means price increase likely

The cement industry of India is in its maturity stage. Excess capacity at one point of time, high
entry barriers, heavy replacement costs and depressed cement prices were some of the factors
leading to large-scale consolidation in the industry. Consolidation implies oligopoly situation
with lesser number of players and larger market share per player. The top companies holding
majority of the market will be in a position to be the price markers rather than price takers. Such
a command over prices once again spells good news for our top picks in the industry.
The following 5 top players currently control more than 70% of India’s cement
L&T has been changed to ultra tech.
Outlook on cement prices positive

Cement prices increased by 5.1% in FY04 compared to a 9.3% decline in FY03. With
expectation of a healthy demand growth of about 8-9% and supply relatively stable at current
levels. The estimate is that cement prices will improve further by about 4-5% in FY05. The price
rise is however expected to be more in North and West India, due to reducing demand-supply
gap in these regions.

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A play on the commodity cycle

Cement is a commodity wherein profits are determined mostly by the volumes generated and
the price realization per unit of sales. Cement cycle is expected to continue the upward trend
for the next 2-3 years. Healthy demand, low capacity additions and heavy consolidation in the
industry will cause cement prices to rise. This augurs well for industry leaders like ACC and
Gujarat Ambuja, wherein a Re1 increase in the price of cement will add considerably to the
operating profit of the company.

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Study of the Commodity: Shipping

Introduction:
95% of the world’s trade is carried out through ships. An international fleet of 40,000 ships the
world over garners more than US$200bn in freight rates. Waterways are the most economical
and environmentally friendly mode of transport. Technological developments in shipbuilding
and communication systems have made navigation through long distances easier.
Ports and Shipping are an important part of the transportation infrastructure. There are 12
major ports and 185 Minor / Intermediate ports located along India’s 7,517 km long coastline
along the mainland and island territories of India. Out of the 12 major ports, 11 are managed by
their respective Port Trust Boards. The ports in India account for 95% of the country’s foreign
trade in volume terms and 75% in value terms. In India core sectors like iron ore, steel, coal,
petroleum, chemicals, fertilizers etc rely on the shipping industry to transport majority of their
raw materials and finished goods. India has a vast coastline of 7,516kms and thus a majority of
its trade with other countries is undertaken through water transport. Performance of the
economy bears a direct impact on the shipping business. Some of the major players in the
Indian shipping industry are Shipping Corporation of India, the Great Eastern Shipping
Company Limited, Essar Shipping Limited, Varun Shipping, etc.
Shipping is a cyclical business and is affected by ship manufacturing activity around the world.
When demand for tonnage increases, new ships are ordered to be made. Tariff rates increase
by the time ships are made, as it takes 18-24 months (subject to size and specifications) to
build ships. As new ships start coming in, the rates reduce drastically due to the increased
supply.
Demand & Supply Model in Shipping Industry:

The bulk dry trades are taken as an example. The analytical framework that is being presented
has some underlying assumptions which are mentioned below:-
1) Each ship-owner/ship management company is seeking to maximize their profits, (or
minimize their losses).
2) Each charterer is seeking the cheapest rate consistent with an acceptable quality of service
offered by the ship-owner.
3) There are a large number of fixtures (deals done), the details of most of which are readily
available to all market participants (i.e. we have good information of the market transactions to
guide us).
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Modeling Demand:
The individual shipper’s firm requiring transport/shipping services regards the freight rate as a
given value, which they cannot alter through their own individual action. It is assumed that there
is a downward sloping relationship between the cargo volumes to be moved and the level of
freight rates, other things held equal. The higher the rate, the smaller will be the demand for
cargo movements, and vice versa (inverse relationship).
The demand for dry cargo tonne miles (multiplication of tones carried over a distance in
nautical miles) is a derived demand.
Freight rates are measured on the vertical axis and quantity of the commodity (or cargo tonne
miles) is measured on the horizontal axis. D1, D2, and D3 show three different demand
schedules, each further out to the right. These represent different volumes of demand,
generated by higher and higher levels of economic activity, industrial production, or world trade
volumes. A fall from D2 to D1 would represent a decline in tonne miles demanded, or cargo
tonnes moved. A rise, or shift of the demand schedule from D2 to D3, would represent the long-
term expectation.
Over a long time period, it is anticipated that the trend will be a shift out to the right.
Modeling Supply:
Under competitive conditions (and given a choice), theoretically the ship-owner should never
accept a freight rate that is less than the average variable cost of the ship’s output. Different
ships have different costs, because either they are of different ages, or because they operate
under different flags, or face different wage costs.

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The shape of the supply schedule is drawn here for reference in figure 2. It is drawn so that it
becomes steeper in slope as maximum tone mile production is attained. There are two reasons
for this. Firstly, the additional tonne miles being created near ‘full capacity’
are being created by the more inefficient vessels in the fleet, the ones with higher variable
costs. These vessels add a lot to costs without adding that much extra to output. Secondly,
speed increases are a limited way of raising output. The extra costs of fuel consumption
increase more rapidly than the extra output, so the required supply price increases.
In the language of economics, the supply curve represents the additional or marginal costs, of
meeting the extra output required. This proposition is only valid if the market is itself
competitive.
Determining the Equilibrium Freight Rates:

The market is defined as the interaction of supply and demand, which both together determines
the equilibrium freight rate and quantities sold at that rate. Figure 3 below shows several
different possible short run market equilibrium, each determined by different demand
conditions. The key factors that make demand conditions alter relate to the volume of world
trade, which is driven by overall economic activity, and changing degrees of openness towards
trade by individual nations. Demand curves further to the right represent larger trade volumes.
Demand volumes increase from D1 to D4. Between D1 to D3 there is a relatively small rise in
the market freight rate and a large rise in tonne miles produced. But between D3 and D4, the
increase in demand is translated into large increases in rates, because supply becomes very
inelastic, and the scope for increases in supply becomes increasingly limited.

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In Figure 4, we see close to what is happening in the market in the recent past and even today.
It has been reported that close to 10% of the Capsize fleet is tied up in the ports due to port
congestions. This basically takes the ships out of the market for lifting further cargo stems, thus
creating a virtual shortage of supply. The result is very steep increases in the freight rates.
The above model can be used to examine short run fluctuations in market conditions, but not
long run ones. This is because the supply schedule represented in Figure 2 and 3 is drawn for
a given stock of ships. It is a useful framework to explore fluctuations in freight rates in the
short term however.
Consider the shift in demand from D3 to D4. Rates move up very sharply, and supply does not
increase much. This creates large profits for existing ship-owners, who will be encouraged to
order new vessels. The value of existing vessels will also rise, reflecting the markets’
expectation that profits are going to be healthy in the future. The increased number of orders
will translate into a rightward shift in the supply curve in the long term, and this will lead, to a fall
in rates if demand remains at D4.
Background to the Indian Shipping Industry
Indian shipping sector does not exist in isolation and is directly influenced by the markets all
over the world. And inland waterways have not yet developed that much that it can make any
difference in the fortunes of the shipping companies. As shipping activity is directly related to
the Global GDP and the economic activity all over the world, the forces which influence the
shipping fortunes are mostly controlled by the countries that have lions share in the world trade.
Some of the factors, which have over the time become very important in the changes in the
freight rates in the shipping sector, are following:

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 Major exporting countries growth

 Major importing countries growth
 Recovery of U.S
 Severity of winters so as to maintain the reserves of oil for the winters
 Demand and supply mismatch of the fleet available
In the recent times china has acquired significant importance in the seaborne trade because of
its huge exports and imports. It has come to such a level the changes in the GDP of china can
send the shipping sector into shocks. It therefore has a special place with regard to the fact that
it can bring spurt into the freight rates and also send them to such a low level that investors can
get shocks.
Many Indian companies deploy their vessels overseas to take advantage of higher rates; the
domestic rates also underwent an upward revision due to inadequate supply and increased
demand at the domestic front. The freights are decided depending on the general freight rates.
The payment terms can be as mentioned below:
Payment terms
Companies charge freight rates depending on the nature of usage of their ships i.e. whether
the ships are taken on time charter or voyage charter.
Time charter
Time charter means that a ship is taken on hire for a particular time-period say one year. Under
a time charter, the ship owner is responsible for running expenses of the ship such as
consumables, maintenance, insurance etc but the charterer has to pay for expenses such as
port dues, canal tools, bunkers etc. Freight rates are determined in the beginning and remain
constant throughout the charter period. The advantage is that, one is sheltered from adverse
swings in the freight rates. The ship owner gains if freight rates fall and vice versa. The general
practice of shipping companies in India is to keep a significant portion of their fleet under time
charter.

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Voyage charter
As against time charter, voyage charter means that a ship is hired for a particular voyage say
from Mumbai to Singapore. Here, the ship owner has to incur running expenses as well as
expenses like port dues, fuel cost, canal charges etc. In this case, the freight rates are decided
separately for each voyage depending upon the general level of freight rates. The shipping
companies here are exposed to greater risks, as they affect the movement of freight rates
immediately. There could be some opportunities to earn higher rates if a particular type of ship
is not available or a particular region faces a shortage of ships. In case of an increasing freight
rate scenario, the company that has majority of its ships on voyage charter will thus benefit
more and it will tend to loose incase of a decreasing freight rate scenario.
Apart from freight rates, other cost items that impact the profitability of the industry are:
Dry-docking
Dry-docking is one of the major expense items, which needs proper planning. As per industry
norms, every ship has to be dry-docked twice every five years. Moreover, the duration between
two dry-docks should not exceed three years. Dry-docking actually involves taking a ship out of
water and undertaking repairs wherever necessary. A close inspection of the ship indicates the
damage occurred and need for repairs. Dry-docking is necessary to keep the ship in good
working condition. However, dry-docking involves loss of working days for the ship resulting in
loss of revenue apart from dry-dock expenses.
Although dry-docking expenses depend upon the type of ships and extent of damage, under
normal conditions dry-docking of a Panamax would cost anything between Rs4-8mn. If the ship
is a younger one, it should take 10 to 15 days of dry-docking. Again the number of days will
depend upon where the ship is being dry-docked. Normally, in Indian yards, the number of days
taken for dry-docking is more due to absence of modern facilities.
Bunker expenses
Another important cost for a shipping company is that of bunker or fuel which runs the ship.
The current situation is quite favorable in this regard, as the fuel prices are quite low. However,
when fuel prices are high they can significantly affect the margins of shipping companies.
On an average, a Panamax consumes 25-30 ton of bunker per day. Reducing the speed of the
ship, thus reducing the consumption, can reduce bunker cost. However, this increases the
travel time for the ship and hence other costs. Hence a balance has to be struck between the

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bunker cost and other costs. Another way of reducing the bunker cost is to maintain the
engines in excellent condition by way of continuous overhauling. The latter also involves cost;
hence striking the balance is necessary.
Crew expenses
If a ship is compared with a factory then crew will be the factory workers and their salary would
be a major expense. In India, the government and the crew unions have certain norms
regarding the number of crew on a vessel. Foreign shipping companies follow international
norms.
Profit or loss on sale of ships

For acquisition of new ships or improving their cash flows or for getting rid of age old ships,
shipping companies sell ships to realize profits or losses. Normally ships are sold depending
upon the company's expectations about future freight rates and ship prices. Profits from sale of
ships account for a high proportion of profits to shipping companies.
Classification of ships
On the basis of the cargo carried, ships can be classified into liners and tramps. While liners
carry passengers and freight (containers), tramps carry dry bulk and wet bulk (tankers). Dry
bulk carriers are used to transport bulk goods such as grain, iron ore and coal. Tankers are
used to carry crude oil, petroleum products, chemicals, etc. Tankers can be further classified as
oil tankers and product tankers.
Offshore vessels are essentially tugs, supply vessels, and drill ships, etc, which transport men
and materials to offshore oil installations.

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China Factor in the Structural Change of World Shipping Industry
I. The Structural Change of World Shipping Industry

World shipping industry has been undergoing a structural change over last decade. The feature
of the change is that, Asia, notably East Asia, has overwhelmingly become the powerhouse of
world shipping business as the largest importer of raw materials and the largest exporter of
manufactured goods. Though Asia GDP figure is smaller than the US and European Union,
and if excluding Japan the region’s economic scale is much smaller, this region has consumed
more raw materials and produced more manufactured products than either of them. In
shipping, the volume rather than value matters.
II. China- the Powerhouse of World Shipping Market

After China became a member of the WTO at the end of 2001, the extremely high growth in the
country’s exports and imports helped stimulate the world economy. This has helped lift the
prices of key raw materials, including oil and steel, and has been an important factor in the
freight market boom. China’s economy is ranked 6th in the World.
1. Container shipping
Industry’s reliance on Chinese trade growth has come to a point that any change of Chinese
demand will have an immediate influence on shipping market. It is quite obvious that the freight
market usually calms down during three important Chinese holidays. Now shipping industries
not only talk about Easter and Christmas, but also Chinese Spring Festival, International
Labour Day (May 1st) and Chinese National Day (October 1st).
2. Dry bulk shipping

In the past decade, the annual growth rate of major dry bulk sea borne trade of China is 17.2%,
Japan 5.4%, European Union 2.3%, and the US negative. The speed for China has been
accelerating over the recent three years, with an average growth rate of 19%. Actually, China
has contributed 50% of world dry cargo shipping net demand increase since 1999.
3. Tanker shipping
Robust economic growth fueled China’s crude oil imports to increase 31 percent to record level
in 2003. China imported 91 million tons of crude in 2003, or about 1.87 million barrels per day,

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up from 69 million tons a year earlier. In the first five months this year, China imported about 50
million tons crude, increasing by 59%. Together with strong demand from other nations such as
the US, India and Korea, the tanker freight rates maintained firm throughout the period from
late last year.
III. The Future Development of China Factor in World Shipping

Nowadays nobody doubts the fact that China has become the primary world factory, taking the
advantages of its cheap and productive labor force and huge domestic market. This is reflected
from the container trade volume going out of China.
In fact, the basic factors supporting China’s long-term growth have been enhanced last few
years.
Firstly, China’s joining in WTO two and half years ago gives both Chinese companies’ access
to the world market and foreign companies’ access to Chinese market. On the other hand,
foreign companies have increased their confidence in China.
Secondly, the recent economic reform policies from last year push the state-owned enterprises
reform a big step forward and give the private sector a full wing to develop. The
entrepreneurship of the nation is being released.
Thirdly, the endless source of Chinese human capital provides a strong backlog for long-term
growth of Chinese economy. In next ten to twenty years, hundreds of millions people will
migrate from the countryside to the urban areas and become workers in the plants. In addition,
tremendous emphasis upon education, graduating 700,000 engineers a year, compared with
only 70,000 in the US.
In addition to the above basic factors, China’s entry into a heavy-industry period, the ongoing
historic movement of urbanization, and the coming 2008 Olympic Game in Beijing, are all
creating huge demand for the economy.
In a word, such an economy will need to import more energy and raw materials like crude oil
and iron ore, though a much more efficient use of them is very necessary, and will export more
manufactured goods to the rest of world.

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Indian side of the coin
Key Performance Indicators:

The GDP estimates for the current year are optimistic in line with the previous trends. Last year
GDP registered a growth of 6.9% as against 8.5% in the year 2003-04. This was largely due to
deficient rainfall, hardening of oil and petroleum prices and tsunami which caused great
damages to life and property.
India is already being seen as a new hub for exports of auto parts and other engineering goods
and opportunities are expected to open in the textile sector after the phasing out of textile quota
next year.
Implementation of Tonnage Tax:

Tonnage tax is a global practice of taxing shipping companies. It is calculated on a flat rate on
the Net Registered Tonnage (NRT) of the company after presuming a certain income on the
same. In India, shipping companies are taxed like any other company at the corporate tax rate
of 35%. After factoring the benefits available to shipping companies under section 33AC of the
Income Tax Act of India, the effective tax paid by Indian shipping companies is around 10- 14%.
This is still a high tax rate when compared to effective tonnage based tax of 1-2% paid by most
companies around the world.
The government recently announced its intention to replace the existing corporate tax with
tonnage tax taking the UK Tonnage Tax Act as the basis. It will bring taxes in line with global tax
levels without creating a need to change the tax structures and economic policies in other
sectors.
Tonnage tax will show a positive impact on net profits of the industry players as tax liabilities
reduces. The net effect can however be quantified only after details of the policy are made
clear by the government. Reduction in tax liability will leave additional funds in the hands of
companies for further expansion in the sector. International companies perceive tonnage tax
more convenient for operating in the country. This step is thus, expected to boost foreign
investments in the sector. It will also boost the implementation of the Prime Minister’s Sagar
Mela project worth Rs1000bn.

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Agricultural and allied sectors:

In contrast to the deficient rainfall witnessed in 2004-05, 2005-06 witnessed favorable
monsoons, which is good news for the agricultural sector. And this combined with Governments
realization of the fact that rural economy is a bottleneck that can stifle the growth. This is good
news for the shipping sector as agricultural and allied products form a considerable part of the
dry bulk carriers.
Industry:
The industrial sector is poised to do well due to fact that there have been positive policies that
are being incorporated by government. Abolishing of the quota system in the textile sector will
benefit India. And the added advantage that India has of being a favorite outsourcing
destination, for example the auto ancillary etc. This can add to the tonnage carried by the
shipping sector.
Exports have grown by 25.6% in USD terms in 2004-05, as against an export growth of 21.1%
in 2003-04. Commodity wise export growth continued to be broad based with manufacturing
sector taking the lead. The main sectors that were driving this high growth were engineering
goods sector, gems & jewellery sector, textiles sector, chemical and related products sector,
petroleum products sector. Imports continue to surge in 2004-05, witnessing a growth of 34.7%
in comparison to 27.3% in the year 2003-04.
Other important features of the export performance included a turn around in exports of
agriculture and allied products and manufactured goods, a surge in exports of ores and
minerals and growth in exports of petroleum products. The trends are here to stay because
Indian companies (ONGC Videsh) are on an acquisition spree and are adding newer capacities
to the existing capacities, this will give boost to the shipping sector.
Automobiles:
A host of major international automobiles companies are using India as a platform for export
oriented production. (This is one of the important potential sectors identified in the Medium
Term Export Strategy 2002-07 announced by the Department of Commerce). TELCO is
exporting Indicia to the European Countries under the name of City Rover; Maruti has also
started with the same operations.

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The surging automobile export from India has many auto majors coming and setting up
facilities to use the country as a manufacturing hub because of the low cost of production.
Many of the global car companies, including Suzuki, Honda and Hyundai are here. Hyundai
Motor India, the country’s second largest car manufacturer and the Indian arm of the $47-billion
Korean giant, is reportedly investing $200 million to enhance their capacity to meet the
expected surge in demand. Tata’s Indica, whose export edition known as City Rover is raking in
appreciation from countries like UK, where its makers are hopeful of selling one lakh plus units
by the year 2008. Thanks to the warm welcome accorded to ‘Made-in-India’ vehicles by foreign
countries, India is expected to replace Korea as the global manufacturing base for compact
cars in the near future.
Textiles
Textile exports performed well during April-February, 2003-04 except cotton textiles. The
reforms in indirect taxes i.e. introduction of CENVAT reduction in import duties and
technological up gradation will help improve our export competitiveness in the post quota
regime.
In the Indian context, there are certain positive and negative developments:
 On the positive side, many foreign vessel owners are disposing their single hull vessels
and this provides opportunity for Indian companies to acquire them at very attractive
prices.
 On the negatives side, the recent decision of Transchart, the government arm, which
arranged for contracts on behalf of the oil PSUs, to allow Indian Oil Corporation (IOC)
the right to buy crude on C&F basis has caused some concern amongst the domestic
shipping companies. So far Indian shipping companies have had the first right of
refusal for transporting of crude for the public sector oil companies and more than 50%
of IOC imports were handled by the Indian fleet. This development will allow the crude
suppliers to deliver crude at Indian shores by making their own shipping arrangement
thereby forcing domestic companies to compete with the foreign companies for these
supplies. However, since Indian flag vessels normally get berthing priority and enjoy
lower port charges, they may still be in advantageous position vis-à-vis foreign flag
vessels.

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Outlook

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Tanker Business
Outlook for the Tanker Market

The global tanker order book currently stands at about 81 million DWT, or 26% of the fleet at
the end of March 2004. Of this, approximately 21 million DWT, or 7% of current fleet, is due for
delivery in 2004. However, we expect that tonnage accretion net of scrapping will be in the
region of about 4%, and this will be balanced out by the increased demand of about 3-4% for
tankers. Therefore, the fundamental outlook for the tanker market appears to be positive.
Dry Bulk Business

The Baltic Dry Index (BDI), which is generally used as a measure of the health of the dry-bulk
markets, stood at 1943 at the beginning of financial year 2003-04. As on 31st March, 2004, it

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stood at 4822, an increase of almost 150% over the year. It touched a high of 5681 in early
February 2004.

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Outlook for the Dry Bulk Market

The dry bulk vessel orderbook stands at about 51 million DWT, or about 17% of the existing
fleet at the end of March 2004. Of this, approximately 14 million DWT (or about 5%) is due for
delivery in 2004.
With the world economy projected to grow by 3-4% in 2004, and the Chinese economy forecast
to grow at only slightly below its growth rate of 2003, demand for movement of dry bulk
commodities is expected to be strong. Therefore, dry bulk markets are expected to be at
healthy levels, though possibly not at the exceptionally high levels seen in early 2004.

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Risks and Concerns of the Indian Shipping Sector

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Market risk: Freight markets have traditionally been very volatile, with dramatic swings seen
over even short periods. Any such movement would substantially impact the earnings.
Therefore a rational move is to hedge some of this risk by entering into time charters for part of
fleet and keep some fleet to bear the fruits of the spot prices if they remain high during the
years.
OPEC action: If the OPEC goes through with its announced intention to cut production, it would
result in a reduction of long-haul cargoes and therefore negatively impact the demand for
tankers.
High proportion of single hull tankers in the fleet: most of the tankers in the Indian fleet are
single hull and after the prestige accident EU has banned single hull tankers in its waters of
age more than 15 years. The single hull tankers in the fleet could be vulnerable to any further
changes in regulations that may take place.
Domestic Developments
Historically, a gap between consumption and production levels of oil exists in India. Over the
years, growth in consumption levels has outpaced the growth in levels of production. India’s
consumption of oil has registered a CAGR of more than 5%, over the last decade while the
domestic crude oil production has seen a CAGR of a meager 1% for the same period. This has
made oil security a prime concern for the Government of India. With a view to attain self-
sufficiency, the Government has undertaken reforms, both, structurally and operationally.
Introduction of New Exploration and Licensing Policy (NELP) is one such major initiative
wherein blocks are awarded to operators both in the public and the private sectors. Another
significant development was, ONGC seeking “Expression of Interest” for development of their
marginal fields. These are small viable fields of Oil & Gas to be commercially developed by
small-to medium-size operators with improved cost-effective technology. This presents a major
opportunity to several operators as well as contractors.
Risks and Challenges of Port Congestion

Port industry is closely related with ocean shipping market. To match the steady growth of
international trade, major trading countries have made great efforts to expand fairways of their
ports and increase water depth of the berths, and replace traditional and conventional port
facilities with larger ones to increase goods handling capacity and receive larger ships.

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However, the construction of bigger berths can usually not catch up with the growth of imports
or exports in many places. Current severe port congestion is also negative effect to the
shipping market.
Government will facilitate the construction of an International Container Transshipment
Terminal (ICTT) at Vallarpadam in Kochi Port on Build, Operate and Transfer (BOT) basis.
Presently, due to inadequate draft and cargo handling infrastructure, main line vessels often
skip Indian ports. Containers from India are carried to their final destination after Transshipment
at Colombo, Dubai and other neighboring ports. ICTT will help in the development and
expansion of port infrastructure in India. This is a very good step and if implemented quickly
can help in not only the facilitation of trade but also save foreign exchange which now goes to
Colombo and other ports in the form of transshipment charges.
Further in the current Budget Government has made a realization that the infrastructure in the
shipping sector is becoming a bottleneck that will stifle the growth of the economy. From the
budget it does appear that Infrastructure will get an impetus this fiscal. Broad regulations are
already in place and with government looking forward to contribute 100 billion towards funding
of roads, ports, airports and tourism through the set up of a Special Purpose Vehicle, will give
this sector a kick start.
As per the Five Year Plans the focus during the 10th Five Year Plan period (2002-2007) is on
modernization, cost effective service, enhancement of service quality and increased public-
private partnership. This Plan has targeted capacity addition of about 126 MTPA in the major
ports. An amount of approximately US$ 944 million from public funds has been earmarked for
modernization and development of major ports during the 10th Five Year Plan period. In
addition to Plan allocations for major ports, investment to the tune of US$ 2345 million is
expected from the private sector during the 10th Five Year Plan period (2002-2007).
There are plans to increase the share of coastal shipping from 7 per cent to 12-13 per cent of
the total domestic cargo by 2012. Lower vessel rates (40 per cent lower than foreign bound
vessels) are expected to act as an incentive in this regard.
Glossary: Industry Terms

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Baltic Dry Index: As most of us know, the Baltic Dry Index (BDI), which is calculated on 12
typical routes, as an indicator of the market. But now some doubt about its accuracy, some
even argue when this index goes higher than 3500, it will never be the right reflection of the
market.
Baltic Freight Index (BFI) [Base: 1985 = 1,000] is the barometer of freight rates for dry bulk
segment. It is a weighted average of the actual freight rates of Panamax and Capesize vessels
at any point of time on 11 specific routes, which represent important trade routes.
Bunkers: All kinds of fuel consumed by the machinery on board a ship in order to operate.
Cargo: Goods, merchandise or commodities of any description, which may be carried aboard
a vessel, in consideration of the freight, charged; does not include provisions and stores for use
on board.
Contract: An agreement recognized and enforced by the law Deadweight/Deadweight

Tonnage (DWT) the lifting or carrying capacity of a ship when fully loaded. It includes cargo,
bunkers, water, (potable, boiler, ballast), stores, passengers and crew.
Demurrage: Compensation payable by the shipper or receiver or charterer to the carrier due
to the excess time taken for loading or unloading a vessel. Demurrage refers only to situations
in which the charterer or shipper or receiver (not the vessel's operator) is at fault.
Freight: Money charged by the carrier for transporting goods. The reward payable to the
carrier for the carriage and arrival of the goods in a merchantable condition, ready to be
delivered to the merchant.
Gross Registered Tonnage (GRT): The volume of each vessel's enclosed area Gross
weight the full weight of a shipment, including goods and packaging.
Net Registered Tonnage (NRT): The internal capacity of a vessel measured in units of 100
cubic feet less the space occupied by boilers, engines, shaft alleys, chain lockers, officer's and

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crew quarters and other spaces not available for carrying passengers or freight. Net registered
tonnage is usually referred to as registered tonnage or net tonnage.
IIL Shipping Index

The IIL Shipping Index consists of 4 stocks, viz, SCI, Great Eastern Shipping Company, Essar
Shipping Limited and Varun Shipping Limited based on their relative market capitalization.
Return in the Index is calculated taking April 1 2003 as the base.
SIX DAILY INDICES

Baltic Dry Index
Baltic Panamax Index (BPI)
Baltic Capesize Index (BCI)
Baltic Handymax Index (BHMI)
Baltic Tanker Dirty Index
Baltic Tanker Clean Index
These indices are built up from specifically defined international bulk routes for the particular
trades and ship sizes. The three dry indices are combined to produce the Baltic Dry Index.

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Learning in the Organization

I was in Pune office for my research work as it was the research wing of the organization. As
the name suggest my profile was carry out a detailed research on the commodities which were
assigned to me and provide some data to the research analysts. The summer interns were
assigned commodities to conduct study on. I was given cement and shipping to conduct a
comprehensive study on that.
As an input the organization required some important sites specific to that commodity and
some factors which make a proposition more attractive vis a vis other one. I was also required
to find out the trends in that particular industry.
Methodology Followed:
Data collection:
This was the first step and the time taking process. To get familiarized with the commodity
search was done at very broad parameters initially. As sites were flooded with the information
the screening had to be done. Many times same papers were collected again and again. This
also required extensive reading of the data collected. This lends the basic understanding of the
commodity in terms of its nature; inter linkages with other factors, effect of various factors,
demand drivers, price drivers. After the basic understanding focused search was carried out for
the factors and the trends if they were above the normal industry cycles.
Finding out the reasons for this price fluctuation:

As price was one of the primary factors to be considered, the trends related to price was part of
the focused search. And reasons for price fluctuations had to be found and the studied
carefully. As the changes in the price are closely linked to the demand and the supply, it had to
be studied. The reasons for the change in the consumption of the major demand drivers have
to be studied. The macro level factors like in case of shipping an accident had led to the
pollution and thereby prohibition of the entry of single hull ships in there. This has brought the
prices of those ships down and India having no regulation had an advantage of buying those
ships at a low price. To give an insight demand from china, severity of winters in the states,
export policies of different countries, membership of WTO, port congestion, initiatives of the
domestic governments were some of the factors.
Tracking the trends:

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This helped in seeing the play in the industry cycle. Normally the commodities have a play in
the industry cycles. As the industry goes by the cycles of boom and depression, the
commodities also move accordingly. Any aberration in the normal trends forced to make a
detailed study for the reason therein and brings into light various factors that can affect the
commodities.
Forecasting the price:

After doing the ground work of the data collection, study of price fluctuations and trends. There
is enough understanding of the dynamics that prevail in that particular industry and brings to a
position where we can make predictions about the prices. As in the case of cement, I had to
study the initiatives taken by the government in the construction and infrastructure sector. They
being the prime demand drivers had a great effect on the cement consumption and the prices
of the cement. Again the co-relation between the growth rate and the cement rate was found
out to see the dependence of that industry on the overall economy.
I carried this research for 8 weeks. This period of 8 weeks is one of the most fruitful in terms of
the amount of learning that I did. Personally it added to my confidence that my work will be
used as an input for the reports that will help the employer making money. If I look into the kind
of value addition in this period I can say that it further ignited my interest in Finance. It also
exposed me to the stock market which earlier didn’t interest me much.
To start with work was not at all interesting and was very boring as it required long sitting in
front of computers. Reading a lot of material that too from the past was very tiresome job. But
again when the basics started becoming clear it turned out to be a very interesting. In the initial
stage I didn’t know what was required from me and here my project guide really helped me.
Now I realize that I possess some skills that can really help any organization. Working with this
kind of organization helped bolster my confidence in these financial markets. I was surprised to
see the inter links of various factors. I also saw myself applying the basics of economics and
finance. For the first time I felt that my studies was of some help to me like basics of
economics, arriving at equilibrium and calculating the correlation. I got the experience of the
corporate world as well realized how much satisfaction one gets when he is involved in
providing valuable inputs to the organization he is working with.

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Bibliography
 Visit to the head office of Gujarat Ambuja Chandigarh
 Clarksons research papers

 Bloomberg papers
Sites Referred:
 www.google.com
 www.a9.com
 www.thebaltic.com
 www.economywatch.com
 www.tsj.com (times shipping journal)
 www.indiainfoline.com
 www.globalinsight.com
 www.geshipping.com
 www.hdfcsec.com
 www.cmaindia.org
 www.indiacement.com
 www.gujaratambuja.com
 www.acccement.com

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Madhav Equity & Research Institute (India) Pvt. Ltd.

INSTITUTE OF MANAGEMENT DEVELOPMENT AND

Commodity Research 0 Sidharth Vij

Commodity Research 1 Sidharth Vij

About The Organization 4

Overview: Commodity Market

Study of Commodity – Cement

Glossary: Industry Terms

Learning in the Organization

Commodity Research 2 Sidharth Vij

Commodity Research 3 Sidharth Vij

About The Organization

How The Organization Started

Commodity Research 4 Sidharth Vij

INANI Securities: Bombay

Research Wing: Pune

Methodology Followed: Equity Research

Commodity Research 5 Sidharth Vij

The researches on the stocks are carried out in a methodical manner:

Methodology Followed: Commodity Research

Commodity Research 6 Sidharth Vij

Commodity Research 7 Sidharth Vij

Fort Office Pune Office

INANI Securities Montessori Schools

Commodity Research 8 Sidharth Vij

Commodity Research 9 Sidharth Vij

Decision Making Role

Communication Process In The Organization:

Commodity Research 10 Sidharth

Bombay Office staff Pune office staff

The stock trading team The research team of 4

Commodity Research 11 Sidharth

Commodity Research 12 Sidharth

An Overview: Commodity Market

Commodity Research 13 Sidharth

Commodity Research 14 Sidharth

Study of the Commodity: Cement

Commodity Research 15 Sidharth

Commodity Research 16 Sidharth

Commodity Research 17 Sidharth

Commodity Research 18 Sidharth

Key Success Factors

Commodity Research 19 Sidharth

Commodity Research 20 Sidharth

Indian Cement Industry: Past

Commodity Research 21 Sidharth

Commodity Research 22 Sidharth

Indian Cement Industry: Present

Some link-ups of the Indian cement industry:

Commodity Research 23 Sidharth

Commodity Research 24 Sidharth

Commodity Research 25 Sidharth

Per Capita Consumption:

Commodity Research 26 Sidharth

Commodity Research 27 Sidharth

Industry demand slated to grow by 8% p.a.

Infrastructure spending on the rise

Commodity Research 28 Sidharth

Boom in the housing sector

Commodity Research 29 Sidharth

Cement supply stable at current levels

Increasing consolidation means price increase likely