The Competition Commission has imposed a hefty penalty of Rs.63 billion on 11 cement companies and the industry association for indulging in alleged cartelisation. Although the penalty for alleged cartelisation is being appealed in a higher tribunal, the stated objective to control pricing without taking into consideration costs and slowing demand is bound to cause more harm. Sample this:
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The cost of making cement in India has jumped by half over the last four years, and the rising prices of raw materials, energy and freight all indicate that manufacturers have a tough job on their hands to keep their plants ticking.
Ironically, almost all the costs related to the production of cement and its transportation are the monopoly of the government, leaving companies with no elbow room to control these factors. Adding to the problems, the growth in demand for cement has lost momentum due to the sharp slowdown in economic expansion, analysts say.
Cement is a bulk commodity and it needs to be shipped across vast distances to reach the consumer. Freight makes up a little more than a fifth of the total cost of cement. It has climbed more than a quarter on a compounded annual growth rate over the past seven years. This includes transportation costs of clinker, but excludes freight on raw materials which is usually added to the cost of raw materials.
So, the 30 per cent hike in freight rates in the March railway budget meant a stiff increase in costs. To move a 50 kg bag of cement from Andhra Pradesh, a key producing state, to Maharashtra the new rail freight rates added Rs.15 to each bag; to Kerala Rs.22 and as much as Rs.30 to the north east.
Because the railways are state-owned and freight rates set by the government are not negotiable, cement producers have been using the improving highway network to move cement via road. About 35 per cent of cement produced in India is today carried by the railways, down from more than 60 per cent until a decade ago.
The railways are expected to ship at least 30 per cent of the cement in the years to come, given its predominance over longer distances. The economic size of a cement plant has risen to 5 million tonnes a year from 1 million tonnes, meaning larger long haul costs to get the stuff to the ultimate buyer.
It’s only a matter of time before the government raises diesel prices. This would have the potential to balloon transportation costs further. Again, this is out of bounds of cement producers.
The two other major costs are energy and raw materials. Stable supplies of power and coal, also mostly controlled by the state, have always been a challenge. In the absence of competition, the coal produced by government-run mines is of poor quality with high ash and low calorific value.
As a result, cement companies also depend on imported coal of high calorific value. However, the rupee’s sharp depreciation and Indonesia’s – a major coal supplier – recent moves to jack up prices and restrict exports pose huge risks to costs.
All these factors have resulted in a sharp rise in the cost of building a new cement plant over the past two years. With prices not keeping pace with the increase in input and other costs, EBITDA (earnings before interest, tax, depreciation and amortisation) have plummeted to $1,000 per tonne from a greenfield cement plant, compared with $1,500 that was initially expected.
India is the world’s second biggest producer of cement after China, with output soaring after the sector was completely decontrolled in 1989. But the emerging scenario is detrimental for the industry and the country.
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