The Hindu Business Line : `Cement cos maximising profits, not output'

On the ground
Local demand expected to cross 165 mt this year.
Producers accused of monopolistic trade practice.
Prices as high as Rs 270/ bag in some places.
Call for mediators to resolve producer-consumer struggles.

Chennai April 24 The cement industry may be on a roll. But not everyone is rocking with it. Mr Shankarbhai Desai, Secretary, Builders Association of India, complains that cement manufacturers are maximising profits, not production. When asked "why they shouldn't", he retorted that the correct question was not why they shouldn't but "should they be allowed to?"

Mr Desai does not agree that "imports are unfeasible and unviable". The 12.5 per cent import duty on cement was abolished in January 2007, and, in the first week of April, so were the 16 per cent countervailing duty and the 4 per cent special duty.

Then why aren't imports flooding the market? Because, there is still a problem. A 280-million tonnes (mt) consignment from Pakistan ordered by a Pune builder was turned away last week from the Jawaharlal Nehru Port Trust (JNPT) at Mumbai, because the manufacturer had not obtained the BIS certification prescribed for imported packaged goods by the Director General of Foreign Trade.

A 2,800-mt consignment, booked by a Hyderabad party, arrived at the JNPT on April 20, 2007. But this too is sure to be turned away.

Mediators

The struggle between producers and consumers cannot be resolved at the ports. It has to resolved by mediators in the Ministries of Finance and the Department of Commerce, by bulk users in the Departments of Shipping, Road Transport, Highways, Power and Civil Aviation, and by the influence exerted on the Department of Industries, for and against, by large cement producers and by large construction companies.

So far as the present demand-supply mismatch is concerned, 146-mt of cement were produced over the first eleven months of FY 2006-7, and, going by the 2004/2006 track record, the total will exceed 160 mt. Approximately 75 mt of this was produced by the `big five' — ACC, Ambuja Cements, Grasim, India Cements and UltraTech. According to some cement industry sources, local demand will exceed 165 mt this year.

This seems too slender a gap to explain large profits booked by cement producers. But, said Mr Shankarbhai Desai, it ought to be kept in mind that West Coast cement producers had a fall-back option. Buy from me, on my terms, or I'd rather ship to Dubai, underutilise capacity (according to cement industry figures, utilisation in off-monsoon quarters ranges 91.77 and 99.96), or simply add to inventories, at one or more points along the supply chain.

Risks

The threat is real. Overland transportation costs for cement range between Rs 10 and 20 per 50 kg bag, depending on distance. More important, cement producers are in a position to dictate terms because unpredictable and untimely deliveries can be very costly in the building and construction industry. Which is why prices ran as high as Rs 270 per bag in some places, some of the time.

According to Mr Desai, 17 kg of cement are needed to construct one square foot of an ordinary building, with cement (priced at Rs 160 kg per bag), accounting for 20-25 per cent of the total cost. The bright side is that residences, offices, malls and hotels account for less than a fourth of total cement used in the country. The rest is required for non-NHAI roads/highways, jetties, dams, power plants, etc. So, even as they lobby the Director General of Foreign Trade, builders are hoping that they will not have to fight the battle alone.