The Hindu Business Line : Cement prices

It is better to allow cement prices to be determined by market forces, particularly when there is no evidence that the producers have formed a cartel and are deliberately cutting production to hike prices. If the Government tries to impose price controls when the demand is robust, there can be a setback in the expansion plans drawn up by the industry majors, says S. D. NAIK.

Rather than by the ministry concerned, intervention should be by some regulatory body or an institution such as the Competition Commission.

BOOM TIME for cement sector: It is not good economics to control prices by fiat when they are driven largely by robust demand and there is healthy competition among manufacturers. — A. Roy Chowdhury

The pressure exerted by the Commerce and Industry Minister, Mr Kamal Nath, on the cement industry to slash prices appears totally uncalled for at a time when the demand for the commodity is booming and the major players have drawn up plans to scale up capacities in a big way. True, cement prices have gone up by over 50 per cent over the past 12 months while cost increases for the industry are estimated to be around 15 per cent over the same period. But this is only on account of a temporary supply-demand gap.

Discount on ruling prices

Under pressure from the Government, cement manufactures have offered a five per cent discount on ruling prices to the Central Government departments. This does not make much sense as purchases on the Central government account add up to hardly 10 per cent of the industry's output.

The manufacturers have also agreed to maintain the current price level. Considering that there are 56 cement manufacturers in the country and over 70,000 retail outlets, it may not be easy for any government agency to monitor prices.

In a liberalised economy, it is always better to allow the prices to be determined by the market forces, particularly when there is no evidence to prove that the producers have formed a cartel and effected deliberate cuts in production to rig up prices.

The capacity utilisation in the cement sector is now over 90 per cent across the country (95 per cent in the South) and production in 2005-06 has risen sharply to 142 million tonnes from 128 million tonnes the previous fiscal, a growth of almost 11 per cent. Cement consumption in the country touched an all-time high of 135 million tonnes in 2005-06 against 127.14 million tonnes the previous fiscal.

Boom time

The cement industry is passing through a boom period following increased spending on housing construction and infrastructure sectors, and the industry increased its installed capacity by six million tonnes to 160 millions in 2005-06. According to industry observers, the total capacity expansion announced by manufacturers is about 32 million tonnes and most of the addition is expected to happen over the next two years. Meanwhile, the prices are expected to remain at current levels over the next 12 months because of strong demand. Incidentally, a part of the present rise in cement prices is seasonal. The prices generally tend to remain on high from October to May when construction activity is at its peak and soften to some extent with the onset of monsoon to remain subdued till September. Better profit margins will induce manufacturers to expand capacities at a faster pace.

It will not be good economics to control prices by a fiat when they are driven largely by robust demand and there is healthy competition among manufacturers. There is surely no need to go back to the era of price and distribution controls, widespread artificial shortages and rampant black marketing of the commodity. It may be recalled that the cement industry achieved rapid growth and competitive strength only after the sector was freed from price and distribution controls in 1989 and delicensed in July 1991.

The installed capacity of the industry rose rapidly from just around 52 million tonnes in 1991-92 to 100 million tonnes in 1999-2000 and further to 160 million tonnes by end-2005-06, a growth of more than three times over the 15-year period. The domestic consumption of cement has also seen a rapid growth from 92 million tonnes in 1999-2000 to 135 million tonnes in 2005-06. Export of cement in 2005-06 was only six million tonnes.

Innovative measures

The better price realisation being enjoyed by industry majors is not only on account of the supply-demand gap that has emerged, but also because of the modernisation and cost-cutting measures adopted by the players in the industry. Over the past few years, cement majors have introduced a number of innovative cost-cutting measures, including restructuring, consolidation, technological upgradation and energy-saving devices.

Cement major, Gujarat Ambuja Cements, for instance, has cut energy costs by reducing the usage of coal through use of substitutes such as crushed sugarcane. It has also adopted other cost-reduction measures such as use of large kilns, high degree of automation. The company also pioneered the utilisation of ship transportation to cut freight costs and has invested in infrastructure such as ports, freight and handling terminals.

Even mid-size companies such as Madras Cements and India Cements have been pursuing innovating cost-cutting measures.

The companies making such pioneering efforts deserve better returns during periods of booming demand. That will enable them to invest in new capacities and plough back some of the profits in new investments. During periods of over-capacity and weak demand, they must be geared to face difficult times. There have been instances of the industry complaining of low prices and poor returns.

If the Government tries to impose price controls at a time when the demand is robust, there will be a setback in the ambitious expansion plans drawn up by major players. Unfortunately, even 15 years after liberalisation, some ministers seem to be finding it difficult to come out of the old mindset that prevailed during the licence and permit raj. Under the new dispensation, the policy-makers should be concerned only if there is sufficient evidence to show that there is cartelisation and an effort by the industry to curtail supply artificially. Even in such cases, it is not the job of the ministry concerned to intervene, but it should be left to some regulatory body or an institution such as the Competition Commission to examine the issue and initiate appropriate action.

In India, a Competition Commission was set up by a Government notification in October 2003. Unfortunately, the Government has not been able to operationalise and activate it so far.

Efforts are needed to make the Commission operational at the earliest in the interest of the healthy growth of the country's manufacturing sector and also to fulfil the country's commitment to the World Trade Organisation.