Cement companies form cartel to boost prices

Cement companies form cartel to boost prices
ENS ECONOMIC BUREAU

MUMBAI, NOV 21: Cement manufacturers are at it again. Leading cement producers, who are saddled with excess capacity, have formed a cartel to create an artificial shortage and push up prices as part of a strategy to come out of the demand recession.

The cement cartel has already started flexing its muscle with leading cement manufacturers -- Gujarat Ambuja, Larsen & Toubro and ACC -- taking a drastic decision to stop supply to Maharashtra for a week -- from November 27 to December 3. The harsh decision has been taken to sustain the price hike in Mumbai, and to further firm up prices.

Leading manufacturers, when contacted, were not forthcoming on the issue. However, leading dealers in the city confirmed the development. When contacted, officials of the Cement Manufacturers Association (CMA) refused to acknowledge the existence of any cartel-like action.

``With the cement cartel becoming active again, cement stocks have been moving up on the stock markets. This has happened despite the poor performance by cement companies. Though the market has not moved up, ACC, Gujarat Ambuja and others have appreciated significantly in the past one week,'' said a stock dealer.

Cement manufacturers have already hiked prices twice during the past week -- the first one was an increase of Rs 5 per bag and the second one was a Rs 2 increase. Retail prices in Mumbai now hover around Rs 145-150 per bag, while dealer prices have risen to Rs 135-140 per bag. Mumbai is the country's largest cement market, with a monthly consumption of three lakh tonne.

Thanks to the cement cartel, dealers say the prices are expected to go up by another Rs 10 in the coming week. Industry sources also pointed out that most plants are currently working below their optimum capacity. In spite of this, most of the plants have outlined ambitious capacity expansion programmes. ACC has completed modernisation and expansion of its Chanda (Maharashtra) and Madukkalai (Tamil Nadu) plants, which now have a combined capacity of around one million tonne. A new-look plant at Wadi (Andhra Pradesh) with a capacity of two million tonne per annum is under implementation. Gujarat Ambuja has also outlined an ambitious capacity expansion programme of 7.5 million tonne at an estimated cost of Rs 1,320 crore.

With the September ending quarterly results leaving all the major players in the red, the industry is desperately looking for a breather. The scenario for the future does not look prospective either. With the Finance Minister finally admitting the downturn in the economy and the GDP growth estimates being scaled down, the cement industry does not seem to be poised for happy times.

Barring south India, cement prices have gone for a free fall during the first half of the current fiscal. Industry sources point out that the price fall is alarming considering that the October-January period is considered the best part for the industry. Moreover, the Rs 20 per 50 kg bag fall in prices in Mumbai, which is the major market for cement consumption, has left cement producers concerned.

The infrastructure sector which directly has a bearing on the industry is also not passing positive signals. No doubt, the judgment on the Narmada Dam Project has come as a relief for the industry, but analysts point out that the project will add 2-3 lakh tonne per annum in cement demand. This does not seem to be of much consequence in a capacity of 100 million tonnes, point out analysts. Furthermore, the demand will remain confined to Gujarat which has already lost 2 million tonnes in demand due to drought conditions prevailing over the last two years.

Another important determinant for cement demand which happens to be rural housing has not taken off much due to rural incomes remaining squeezed.Moreover, the prestigious golden quadrilateral project and the north-south and east-west corridors have not yet taken off. Apart from the Lonavla-Khopoli section of the Pune-Mumbai Expressway, and some portion of the National Highway in Andhra Pradesh, work is not much in progress.

Faced with this demand depression, cement companies have taken to exporting even at 15 per cent of the realisation in India. Industry analysts feel that the next quarter does not hold much promise for the cement companies. With demand remaining depressed and prices falling, the addition to capacity may not be coming at a too opportune time.