One year ago, to be precise, EQUIPMENT INDIA in its May 2012 issue, came out with a cover story on the growth potential of crushing and screening equipment (C&SE) segment. We interacted with most of the major C&SE manufacturers to get the actual pulse of the industry; and our cover story intro reads as follows: 'The government's commitment to complete 7,300 km of roads in 2012-13 basically translates to a demand for approximately 39 crore tonne of aggregate. And if we calculate using the example of a 200 tph plant which produces approximately 600,000 tonne per annum, the requirement of plants will be 650 units of 200 tph plants for the roads and highways sector alone.
Have the hopes of the industry been crushed by the policy paralysis? How has the C&SE industry been weathering the storm of scams in the coal sector, the closure of iron ore mines and inactivity in the road sector? What does the future look like? EQUIPMENT INDIA casts a keen glance down that road, with inputs from major players.
Somnath Bhattacharjee, President-Material Handling Solutions & Equipment and Project Solutions Business, TIL, says, "The NHAI project award faced significant challenges in FY2012-13 due to policy related hurdles such as environment and forest clearances, besides delayed financial closures. The new project award touched a new low of around 800 km in FY2012-13.The actual completed road projects during FY2012-13 is 2,800 km against an annual target of 7,300 km."
According to V Senthil Kumar, Managing Director, Propel Industries, out of a targeted 7, 464 km of roads by the NHAI in 2012-2013, only 1115.8 km of roads have been done. "This is mainly due to delays in allotment as only about 700 km was awarded till October 2012. There was no good response from bidders due to the slowdown in economy, viability of some projects, and lack of equity in the market, regularity and clearance issues. This resulted in a steep drop in the requirement of crushing plants though the commercial segment is still sustaining a positive growth." NHAI is taking measures to address the issues soon so that the plans could be back on track, Senthil says.
Impact on C&SE segment
"2012 was a very challenging year for the country. Though 7,300 km of road building was to be awarded, less than 800 km of projects could take off. This did impact the demand for crushers and screeners. There was also the major issue in the iron ore mining sector too. The Karnataka and Goa mines were shut down due to various reasons, which reduced the demand heavily," says Rajen Khoda, Director of Sales - South Asia and Middle East, Powerscreen.
The view is supported by Jaideep Shekhar, Executive Director, Terex MPS. "Demand for C&SE is driven by mining and infrastructure, and we all know these segments were amongst the worst hit last year. Mines were either shut down by the judiciary or partially operating, and there were delays in completion of infrastructure projects for various reasons. Through this year, we do not see a drastic change likely to occur, and estimate that the current trend may well continue into early 2014," says Jaydeep.
Viraj Parthi, Country Manager, Terex Finlay says, "Realistically, I don't think it will be possible to achieve the forecasted numbers. As far as the demand for crushers and screens is concerned, 2013 will be more challenging for us as compared to 2012. The government is taking some measures but results will take time. Moreover, a lot of issues are impacting the industry and confidence levels of contractors and the business sector is not going to change overnight."
Parthi adds, "If we talk about mining and specifically Iron ore mining where crushers were used extensively, the growth levels up to 2008 were very encouraging. Recession in the economy and then later the ban on iron ore mining in Hospet-Bellary area, Karnataka and in Goa affected the crushing and screening sector. So, in the last three years we have not seen any significant sale in these areas for tracked plants. We hope things will go in the right direction with news coming in that some activity has started in Hospet-Bellary region. But it will take time as there are a fleet of machines that are lying idle for the last few years. There are also restrictions regarding production capacity so it will happen but not to soon."
In brief, the situation doesn't look good. To quote Bhattacharjee, "In the current market situation, infrastructures and road projects are the major demand drivers for crushing and screening equipment, especially in view of the challenges faced by the mining sector. The fact that each kilometre of road built by the NHAI requires approximately 40,000-50,000 tonne of aggregates clearly indicates the potential of demand. But the growth in demand did not pick up to the earlier forecasted level, due to the dismal performance of road project award in FY2012-13."
Has it led to an imbalance in the demand-supply scenario? The answer seems to be in the affirmative. Says H Sankaranarayanan, Director-Operations, Taurian Engineering, "In the present scenario, of the total road projects that have been sanctioned, only 10-15 per cent has been completed. The rest of the projects are all stalled due to various reasons. This has had a direct impact on the C&SE industry because most of the infrastructure companies have stopped buying machines. So, there is excess stock of crushing plants with the companies and it has an indirect effect on our earlier plans. Then, mining activities have come to a standstill. So it has really affected the overall business." Adds Jaideep, "There is no demand-supply crunch since there is a lot of idle capacity available in the mining segment. Not many new major requirements have cropped up since last year, since mining was either clamped down by the state or by new projects were unable to take off due to land acquisition issues."
The healthy growth of the C&SE industry depends on sustainable growth of infrastructure and mining industry. Bhattacharjee points out, "Growth of infrastructure and mining industry in an emerging economy like India is largely dependent on clear policies facilitating land acquisition, forest and environment clearances, availability and access to financial resources, financial closures on time, stable interest rates, favourable investment sentiments and other key macro- economic factors, besides good governance. The aforesaid areas have emerged as the key challenges in the Indian infrastructure and mining sector in the last couple of years, causing a slowdown in economic activities."
Khoda says, "Some of the major challenges facing the road sector industry are delays in land acquisition, environmental clearance, and high cost of financing. We know the government is trying to address these issues." Sankaranarayanan seconds this. According to him, a lack of clear-cut policies is a major challenge. "The government policies have to be very clear. As a manufacturer, we need clear-cut policies. Currently, it takes up to six months for a company to get the required clearances," says Sankaranarayanan.
Specifically speaking on some of the issues, Parthi had this to say, "There are a few basic issues. One is the issue of liquidity of major companies. Everybody is running short of funds. Number two is, many non-viable road projects have been awarded. What looked attractive when the economy was going well has now become challenging with the revised environmental conditions. This is the reason for road developers to ask for renewed contracts. This has delayed project executions and it will not fall on track until it is addressed and a solution falls in place. The other very important issues include land acquisition, funding, environmental clearance and mining in some states. The government has started taking corrective measures and if we keep working in the right direction, we will see results in next two to three years."
So what does the industry expect the government to do? Says Parthi, "NHAI should examine whether the rates being proposed by contractors is actually viable and on what basis the rates have been given, because it kills a lot of time between bidding for road projects and actual execution. If the contractor who has been awarded the road wants to renegotiate or does not want to do the road, the bid will be done once again. A lot of time is being wasted on these things. So, the proposal or the offer in the tender should be looked from the view whether it is viable or not. Often, funds of contractors are lying with the government and they have to deposit security money which will be lying there for up to four years. The government has to set up a mechanism to facilitate releasing that money to contractors. What we have seen in the last six years is all the projects were given in the PPP model. There should be a mixture of some projects being funded by government and some in the PPP model. That will infuse some capital in this road sector."
Bhattacharjee says, "A strong political will and consensus will influence good governance, eventually improving the investment sentiments and clearing the policy logjams. As such, the underlying demand of C&SE in infrastructure and mining sectors remains very strong and therefore, a sharp recovery in demand can be expected with the improving situation mainly in land acquisition, environment and forest clearances."
Parthi chips in on a positive note, "I think efforts are going on to remove the hurdles regarding land acquisition and clearances. So, in my perception, we are going in the right direction. They should keep doing so and slowly we will be back on track."
Says Jaideep, "Cost of financing has definitely been an issue. The challenge is compounded when the profile of the buyer changes. Blue chip companies are obviously not looking for equipment financing. The new face of the buyer is small to medium contractors in tier-2 and 3 cities. Many of them may or may not have credit rating records. Thus, availability of financing to such clients is a problem. Terex Financial Services is our in-house arm that facilitates financing for such buyers. They work with the financing companies to ensure that the genuineness of the buyer is established and delinquencies are avoided. "
"The interest rate has remained elevated yet stable during the last one year. However, the interest element is only one component of cost for equipment owning and operating costs. In this difficult and volatile economic environment, focusing on total cost of ownership of equipment can enable mitigating the impact of higher interest element. Though interest rates remained elevated, banks and financial institutions had adequate fund availability to finance equipment purchases," says Bhattacharjee.
According to Parthi, it is one of the major issues. "In fact, the problem is that most of the major banks and financial institutions are shying away from aggressive financing. They are selective and conservative. Customers have to go for other alternates where the rates and cost of finance are very high and many a time, their whole working model will need a relook. Along with Terex Financial Services, we are trying to have tie-ups with credible financing institutions and we are trying to support them in whatever way possible and in turn, we are taking their support to fund our customers."
He adds, "Some financing companies have special schemes. In my opinion, these schemes are very successful for high volume products like backhoe loaders and excavators. For mobile crushing and screening equipment, I don't think those schemes are very successful as volume is too low and demand is based on projects."
Will the renewed focus on the road sector provide a boost to the industry? Says Sankaranarayanan, "As far as the renewed focus on the road sector is concerned, this is a regular exercise in every budget. And this year also, there are big offers. But effectively, nothing is happening. For eg, on the Delhi-Jaipur highway, the 8-lane project has come to a halt since the last one-and-a-half years, despite having funds. In some areas of Rajasthan, the Supreme Court has banned mining.
In this situation, from where they will get the aggregates to construct roads? Indirectly again it is affecting the issues. Unless there are concrete mining policies and pollution control norms, I think it is going to be a very tough situation."
Bhattacharjee does the summing up. Although the C&SE sector is facing the brunt of the slowdown in the infrastructure sector and the ban in iron ore mining by private companies in major parts of iron ore reserves, he says the C&SE demand has registered a better trend, compared to other construction equipment categories. The major part of the C&SE demand has been originating from infrastructure, road projects and commercial quarry owner segments. Most of the new project completion periods in the highway sector have been lowered to 24 months from 48 months. Many state governments are banning or putting restrictions on riverbed sand quarrying. This approach is triggering the higher use of rock sand and crushed ultrafine. Selective lifting of the ban on iron mining in the states of Orissa, Goa and Karnataka is also improving the outlook of demand of C&SE.