The Hindu Business Line : Cement hardens

The cement industry is on a roll. Like never before. Demand for cement, thanks mainly to the construction boom across the country, is growing at a healthy clip. Cement plants are working at near full capacity, and have little headroom to increase output. All this has resulted in prices going up, across the country rather than in specific markets as was the case on earlier occasions. The cement industry feels that 2006-07, when even loss-making companies have turned around rather dramatically, will be a record year in terms of sales and turnover and the next year an even better one. It was these reasons and the fear of criticism that probably prompted the Centre to remove the 12.5 per cent import duty on Portland cement last month. But the industry is unfazed, as it feels that prices are rising because of a genuine demand-supply mismatch than due to artificial factors.

Removing the import duty may just be a symbolic measure with little impact on prices. Anyway, the quantity of cement imported into the country, if at all, is negligible. For, one, there is no capacity available in neighbouring countries from where cement can be imported in large quantities. Two, inefficient port infrastructure makes imports expensive. Three, the added cost of transporting cement from the port to the hinterland could make the exercise even less attractive. In a sector where price and distribution controls have been long dismantled, there is little that the government can do about price rise, even if the hike appears abnormal. The cement industry has a double advantage — the product has no substitute and the high capital investment acts as a barrier to new entrants. Further, with the order books of equipment manufacturers also full, capacity addition by existing players is going to take longer than usual.

If the Government is really serious about tempering cement prices, it must re-visit its taxation policy of the commodity. Cement is highly taxed, the levies include an excise of about Rs 20 on every 50-kg bag, royalties on limestone, lignite, and non-coking coal, a welfare cess for limestone mine workers, not to mention sales tax. Together they make duties on cement amongst the highest in the world. But in the current situation of supply lagging demand by a long chalk, it is doubtful even if a lowering of levies would bring cement prices down. Of course, the Government has little option but to make noise at least to ensure there is no cartelisation, and that the market settles prices fairly.