The Hindu Business Line : Cement: The hardening impasse

The Centre, convinced that cement is one of the contributors to the inflation, wants the industry to cut prices and has initiated several measures to that end. Defending this argument, the industry thinks the Government must let the market rule as it had when the industry was in the doldrums.

STACKING UP inflation woes.

Till mid-2006, the sugar industry was in the pink of health. The outlook was good with retail prices holding firm. Most major sugar companies had chalked out expansion plans. All this till the Centre intervened. Worried about the rising retail prices of sugar, the Government curbed exports. Then started the sugar industry's problems. Globally too the market seemed to have bottomed out with Indian sugar not fetching the prices it did a few months back. Now, the Government is talking of a bailout package for the sugar industry.

Is the cement industry headed the same way? Not likely, say cement manufacturers. The noises made about high cement prices before the Budget resulted in a series of actions that definitely introduced an element of uncertainty about the boom the industry is going through.

Cap on prices

If curbing exports hit the sugar industry hard, freeing up imports is unlikely to result in a flood of cement imports although there are some large users, especially with projects near major ports, talking of importing cement. The Government's moves have anyway resulted in placing a cap on the cement industry's ability to hike prices any more.

Of course, it can be argued that sugar and cement are not the same except that both are commodities. This is true to a large extent. While sugar is still a controlled industry — governments (both at the Centre and in the States) have a say in determining the price the mills pay the farmer and the area from which the mills buy cane, licence is still required for starting a mill and a specified quantity of sugar has to be made available to the government system — the cement industry is not so constrained. The cement industry was freed from price and distribution regulation in March 1989 and de-licensed in July 1991. Still, the sector's fortunes depend considerably on government policies.

The cement industry has maintained that it is highly taxed, and the levies have been regardless of its health. Even in bad times, when retail prices dipped, the excise duty paid was the same as in good times. After a prolonged period of rock bottom prices, the industry's fortunes started changing for the better from 2004. It has had a dream run through 2006, which will continue through 2007 and probably the next financial year. However, some analysts and industry experts fear the Government's moves will result in the boom cycle being curtailed.

Price Issue

The Government says that it has been forced to act because of the rising inflation and also because cement prices are abnormally high in its reckoning. The industry, on its part, points out that the prices are a reflection of the demand-supply mismatch and hence dictated purely by the market. All manufacturers are working to full capacity and still there is a shortage of cement in the market, which is the reason for the high prices, the manufacturers say.

The Government removed import duty on cement ahead of the Budget. Then Budget 2008 came up with a dual excise duty structure. The Finance Minister, Mr P. Chidambaram, said in his speech: "There has been a significant increase in the retail price of cement. Last year, at this time, a bag of 50 kilogram was sold at a Maximum Retail Price (MRP) of Rs 190 or less which, I understand, is a remunerative price. I propose to reward cement manufacturers who hold the price line and tax those who do not." He then reduced the excise duty of Rs 400 a tonne to Rs 350 on cement with a retail price of not more than Rs 190 a bag. On cement with a higher MRP, the excise duty was Rs 600 a tonne.

Short Truce

When even after this the manufacturers did not budge — on the contrary they said that they would pass on the increase of about Rs 12 a bag to the consumers — the Government held discussions with the cement manufacturers. Two rounds of discussions with the Finance Minister and one with the Commerce Minister, Mr Kamal Nath, resulted in a kind of a truce — the industry agreed to hold prices for a year. Shortly after that, when there still was no reduction in prices, the Centre removed countervailing duty and also the special additional duty, which would make imported cement cheaper than domestic cement.

The Centre has maintained that its efforts to curtail cement prices are driven by its desire to tackle inflation. However, the cement industry has debunked this argument stating that cement's contribution to inflation is marginal. There have been some voices in the Government that the cement industry is profiteering — the dictionary meaning of which is "making large profits by charging high prices for goods that are hard to get." Is this a crime, is the cement industry's poser. When prices were down for more than three years in the early part of this decade, in some markets as low as Rs 90 a bag, the government did nothing to help the industry. If the market then dictated the prices, it is the same situation now and why should the government bother to act only now, ask industry representatives.

Capacity problems

Cement prices have recovered from a national average of Rs 155 a bag in 2004 to about Rs 225 now, a 45 per cent increase over a three-year period. Consumption has been growing at over 10 per cent over the last three years because of which most cement manufacturers are working to full capacity. However, with about 100 million tonnes of capacity likely to be added over the next four years, a prevailing view is that supply will exceed demand in 2008-09 itself, at least a year earlier than anticipated. In 2006-07, the industry despatched 155 million tonnes, the highest so far. Once the additional capacity comes on stream utilisation is expected to come down to about 85 per cent across the industry, resulting in prices dropping. However, manufacturers discount this argument and say that capacity addition will not be bunched and would be staggered, because of which there would still be a shortfall in cement supply. For instance, they point out that even a 10 per cent growth in consumption over the next two years would mean 35 million tonnes of additional capacity, which addition is not likely to happen within that period. From a 79 per cent capacity utilisation in 2001-02, the industry ended last year with a capacity utilisation of 94 per cent.

Removal of duties on imported cement has resulted in imported being marginally cheaper — by about Rs 20 a bag — than domestic cement. However, this is unlikely to result in a flood of imports for the simple reason — one that will surely help the Indian manufacturers — that port infrastructure is inadequate to handle large imports. Also, inland transportation of cement will add to its cost, bringing it then on a par with cement manufactured within the country. Some large users of cement say that they will consider importing cement, especially for projects close to the ports, as they expect a 5-10 per cent saving in cost at prevailing domestic prices and CIF prices of imported cement.

Those tracking the sector believe that pricing discipline among the manufacturers is not likely to hold for much longer, for the simple reason that the structure of the industry will undergo a change. Now, the top five manufacturers control over 50 per cent of the market, which will change once the planned capacity additions are completed.

Smaller, regional players will increase their share of the market and they will be prepared to sacrifice sales realisation for volumes, at least in the initial years as the new plants will have to reckon with higher fixed costs.

States' moves

Over the years, governments — both at the Centre and in the States — have been keen to act against the cement industry for high prices. Andhra Pradesh threatened to import cement for its projects, even though the industry has offered to sell cement at a 5 per cent discount to the market price for government projects; Tamil Nadu had a dual sales tax structure depending on the selling price; Chattisgarh has promised to reduce value-added tax on cement.

There are some in the industry who believe that the industry's reaction to the government's moves should have been more sober — at least reduce prices immediately following the Centre's steps and then gradually let the market increase prices, almost like what the steel industry did when it was confronted with a government firm on bringing down steel prices.

For the Centre to act further against the cement industry, it should have proof that the manufacturers are acting as a cartel — something difficult when the commodity is in short supply. It was probably the electoral losses for the Congress (I) in Punjab and Uttaranchal, when high prices were cited as the main reason for the defeat, which prompted the Centre to take the steps it has so far.

Otherwise, it would be better for the Government to let the market dictate prices and only ensure that the manufacturers do not act as a cartel. The Government's moves have not brought down the selling price of cement or reduced the profitability of cement companies. They have only hammered down the share prices.