Containing cost is key

Measures to control cement prices have failed even as the industry criticises the government's "clear discrimination" in favour of steel.

The government and the cement industry have been on a collision course a number of times over the past year, with the former hinting that the latter indulged in price manipulation. As for the industry, it accused the government of bias and favouring the steel industry.

During this period, cement prices went up from Rs 190 to Rs 230 for a 50-kg bag, a rise of 21 per cent.

Cement has a weighting of 1.73 per cent in the wholesale price index and witnessed inflation levels of 10-15 per cent in recent times.

To counter these levels, the government made four direct attempts to ease cement prices in the current calendar. However, such attempts only fuelled the prices further.

Finance Minister P Chidambaram announced in his Budget speech on February 28 a reduction in the excise duty on cement, from Rs 400 per tonne to Rs 350 per tonne for those selling at Rs 190 per bag or below, and a duty of Rs 600 per tonne for those selling above Rs 190 per bag.

This resulted in a price hike of Rs 10-12 a 50-kg bag, because, even before Chidambaram's announcement, cement was selling above the Rs 190 mark.

Despite a rise in input costs, in March the government urged the industry to freeze prices for a year. However, cement manufacturers refused to roll back the price hike it had announced after the dual excise duty was imposed. On the contrary, the industry said a price cut was possible only if the government rolled back the excise hike.

The industry refutes charges of price-manipulation, saying that since cement is a market-driven commodity, demand and supply determine prices.

Cement valuations in the stock market peaked in January but after the Customs duty was removed and a dual excise structure imposed, the sector was downgraded.

"There is clear discrimination between steel and cement, as far as the government's taxation policy is concerned. Ideally, in a growing economy like ours, this should not have been the case as both steel and cement are equally critical for development," Manoj Gaur, president of Cement Manufacturers' Association and executive chairman of Jaiprakash Associates said in a pre-Budget interview.

For instance, the cement industry pays a royalty of Rs 67 for the limestone it uses in manufacturing a tonne of cement, while the steel industry pays only Rs 16 as royalty for the iron ore consumed in producing one tonne of steel. Further, the cement industry is subject to a high VAT (value-added tax) of 12.5 per cent, while the steel sector pays only 4 per cent VAT.

The levies and taxes amount to Rs 931 for a tonne of cement manufactured and account for about 30 per cent of the final price.

Today, the biggest hurdle for cement companies is not capital but obtaining an approval for limestone mining, with a lease request taking as long as 2-3 years to be processed.

SNIPPETS

The overseas factor
In January 2007, the government announced zero duty on cement imports. However, due to higher international prices no imports were possible and domestic prices remained unchanged.

In April, the 16 per cent countervailing duty and 4 per cent special additional Customs duty on cement imports were withdrawn, clearly to soften domestic prices.

Some bulk users have imported cement samples from Pakistan. The shipment awaits quality approval.

While some imports will be possible at lower rates (Rs 190-210 a 50-kg bag against domestic price of Rs 230-235 per 50-kg bag), possibilities of a surplus in cement and reduction in prices seem remote.

The domestic consumption of cement is about 150 million tonnes and imports of a few hundred or thousand tonnes cannot impact domestic prices, say experts.

However, even though the imported cement prices may be lower, facilities to handle and warehouse a bulk commodity like cement are inadequate. The domestic industry also doubts the quality of imported cement.

Countries which can export cement to India are Indonesia, Thailand, the Philippines, China and Malaysia.

Demand-supply divide
The gap certainly exists and has an effect on pricing. Demand for cement is growing at 8-9 per cent per year and shows no sign of moderating.

The industry has announced capacity addition of about 90 million tonnes but most of it will come only by 2009-10 or 2010-11.

This great divide will have a bearing on prices once the freeze period "" from March 9, 2007 to April 2008 "" comes to an end. The domestic cement industry has a capacity of 165 million tonnes, but at 90-95 per cent operating capacity, it produces 156 million tonnes.