The Indian economy has shown strong growth in the past five years with GDP growth at current prices crossing 8 per cent on a regular basis since 2013-14. The construction sector’s gross value added (GVA) at basic prices has also increased correspondingly from Rs 9.22 trillion in 2013-14 to Rs 11.04 trillion in 2017-18, which is almost 7.4 per cent of India’s total GDP for 2017-18.
This steady growth has been driven mainly by the increased pace of growth in the construction, mining and manufacturing sectors. The Make in India initiative is also a key enabler for the construction and manufacturing sectors. Further, the country is poised to become the third largest construction market globally by 2030, with its contribution to GDP increasing to 15 per cent by then. This growth in the construction industry is expected to drive a corresponding growth in the construction materials market as well.
Demand and supply scenario
- Cement-based materials: Cement is the most widely used material for construction in India. There are multiple variants of cement such as Portland slag cement (PSC) and fly ash cement in addition to ordinary Portland cement (OPC). India, which is the second largest producer and consumer of cement in the world, had an installed cement manufacturing capacity of 456 million tonnes (mt) in 2017-18. During the same year, the demand for cement was 296 mt, a surplus capacity of 160 mt. On the trade side, India has largely been a net exporter of cement. Cement exports and imports, in terms of value, stood at Rs 23.05 billion and Rs 10.41 billion respectively during 2017-18.
- Steel: The other major raw material being widely used for construction is steel, which is used in the form of steel rebars, steel window frames, etc. and finds use at almost all construction sites. The installed capacity of steel plants in the country increased from 99.6 mt in 2013-14 to 138 mt in 2017-18. Correspondingly, the production of finished steel has increased from 87.6 mt to 126.8 mt, while the demand for steel increased from 74.09 mt to 90.71 mt over the same period. After a gap of three years, India turned a net exporter of steel in 2016-17, aided by stiff tariff barriers restricting imports. Exports increased from 8.24 mt in 2016-17 to 9.62 mt in 2017-18 and imports showed a slight increase from 7.22 mt to 7.48 mt over the same period. With many importers restricting shipments from China with high duties, exports from India are set to continue rising.
- Bitumen: It is a by-product of the fractional distillation process of crude oil. Nearly 90 per cent of the bitumen produced in the country is utilised in the construction of roads and the remaining 10 per cent in the aviation sector and the waterproofing segment. During 2017-18, India’s bitumen production and consumption stood at 5.27 mt and 6.09 mt respectively. Since consumption is currently greater than production, the gap is met by imports. During 2017-18, India imported 950,000 tonnes of bitumen worth Rs 19.02 billion.
- Geosynthetics and other materials: As per industry experts, India’s annual demand for geosynthetics was about 178 million square metres in 2018, which is expected to expand to around 300 million square metres by 2020. Roads and pavements accounted for over 30 per cent of the total volume, which is in line with the global trend. Another material widely used in the construction sector is aggregates. Aggregates are a key ingredient of concrete which is primarily used in the real estate sector. The road sector is the second largest consumer of aggregates. They are also used in railways mainly while constructing rail lines.
Pricing trends
- Cement: Cement prices have exhibited an upward trend in the past three to four years. This has been mainly due to an increase in freight prices and high power costs. However, for the manufacturers, prices have remained somewhat stable. In the past few quarters, cement prices have been declining amidst weak offtake. In the second half of 2017-18, prices slid sharply because 85 per cent of the capacity additions of the previous fiscal year were commissioned during the period. During 2018-19, heavy rainfall in a few states, including Kerala, kept the demand for the material low and this is expected to keep the prices low as well.
- Steel: Domestic steel prices have improved since 2017-18 driven by favourable domestic demand and anti-dumping duty imposed on imports. Retail prices for 2 mm hot rolled coils increased from Rs 38,825 per tonne in 2016-17 to Rs 46,238 per tonne in 2017-18. Retail prices for 10 mm thermomechanically treated bars also increased from Rs 35,527 per tonne in 2016-17 to Rs 42,016 per tonne in 2017-18.
Challenges faced by Indian construction industry
Rising prices of construction materials
As per a report presented by the Confederation of Real Estate Developers Association of India’s Chennai Chapter released in January 2018, the cost of construction materials showed a sharp increase during 2017-18. Cement, which was priced at Rs 270 per bag in July 2017, increased to Rs 330 per bag in January 2018, a 25 per cent increase seen during the six-month period. The price of steel also showed a rise of 32 per cent from Rs 35,000 per tonne to Rs 47,500 per tonne during the same period. As per the report, this has driven the overall cost of construction up by about Rs 4,300 per square foot and is creating a challenge for real estate developers.
This increase in construction costs is being driven by a number of factors such as shortage of sand for construction activities, increase in the cost of transportation of raw materials, electricity and labour, and rise in lending rates that banks are now offering. This is driving real estate developers to adopt manufactured alternatives such as m-Sand and m-Gypsum to replace conventional sand and gypsum, respectively, as the former are more easily available. Sustainable construction materials such as autoclaved aerated concrete blocks, heat-reflecting white tiles, gypsum plaster, and blocks made of recycled construction debris are increasingly being used. Developers are also considering importing construction products such as high-end fit-outs, glass partitions, bathroom fittings, marble, etc. from China, the US, Belgium, Italy, Malaysia, Thailand, etc. These are of premium quality and the prices are at par with the domestic market.
Further, to check the levels of carbon dioxide in the production of construction materials such as cement, companies are using by-products of other industries such as slag from steel plants for blending during the cement manufacturing process. This helps in the production of PSC, which is not only a green product as compared to OPC but also has stronger properties thus reducing thermal cracks. It also has better resistance against chemicals such as chlorides and sulphates, and offers higher durability.
Sourcing of construction materials flouting environmental norms
The construction industry in India currently sources its materials from a variety of sources including local vendors, organised and unorganised wholesalers and through a tendering process from large corporations. This depends largely on the kind of construction, which ranges from housing in villages to modern urban infrastructure that uses high-end materials.
However, many of the processes followed for sourcing these materials are highly polluting in nature. For instance, the air quality in and around Delhi has deteriorated significantly due to rampant sand mining in the city and in the adjoining areas. This has also led to drying of certain lakes in and around the region causing irreparable damage to the environment.
The way forward
The Indian construction materials market offers a mixed set of challenges and opportunities. On the one hand, the industry is dealing with the challenges of environmental pollution and increasing costs. However, on the other hand, the industry is expected to see significant growth going forward driven by ambitious infrastructure projects such as Bharatmala and Sagarmala announced by the government. Thus, what is required at present is to increase the use of sustainable materials for construction, so that prices of conventional materials and environmental pollution both are reduced.