Nath reads cement firms the riot act

A stern warning to cement manufacturers from Commerce and Industry Minister Kamal Nath to rein in prices caused cement stocks to tumble by 8 per cent today and elicited strong reactions from the industry.

Taking a tough stance against the recent sharp increase in cement prices, Nath gave cement companies time until Monday to come up with remedial measures to moderate the prices. "It is a matter of concern that the prices of cement have gone up," Nath told cement makers at a meeting here today.

"The government cannot remain a silent spectator. We will consider active steps to curtail price rises," he added. Nath threatened to consider measures like imposing a cess or a ban on exports of cement.

The industry reacted in consternation. "Why has there been so much focus on the cement industry suddenly? The prices are demand-driven. Why aren't the same questions asked to other sectors such as steel, where the price rise has been continuous in spite of no considerable increase in input costs," asked AK Saraogi, CFO, JK Cement.

Cement shares fell sharply after the minister's statement. Gujarat Ambuja Cement ended 7.5 per cent down at Rs 106, ACC fell 7.1 per cent to Rs 897, Grasim dropped 2.3 per cent to Rs 2,250.8 and Ultratech Cement lost 4.8 per cent to close at Rs 720.65.

Stating that the government is responding to a "public outcry" on rising cement prices, Nath said, "Limitless profiteering is just not acceptable. Our studies show that the increase in input prices is not commensurate with the extent of the cement price increase,"

"Our inflation index is affected by the rise in cement prices. We do not want price increases in cement that affect other sectors," the minister added.

Cement prices have peaked at Rs 240 for a 50-kg bag in the Mumbai retail market, while in Delhi the prices are at about Rs 235. Since November last year, the prices have gone up by more than 50 per cent. While the companies attribute this to a rise in input costs, Minister of State for Industry Ashwani Kumar pointed out that even after taking all input cost increases into account, the rise in the retail price of cement should have been about Rs 16 a bag, against the actual increase of Rs 41 a bag.

Some analysts believe the government cannot do much on this front. "No government in the world can force companies to bring down commodity prices in a free market," said Deven Choksey, managing director at KR Choksey Shares and Securities.

"The sector's fortunes, I think, will ultimately be driven by the supply and demand factors alone. The companies may agree to cap prices where they are, and I do not think they will cut prices," he added

An analysis of the average price of cement, reported for the major distributors across the country, shows that, while the prices were by and large stable until December 2005, there has been a significant increase every month since then.

In their defence, cement manufacturers said the profit after tax of 37 cement companies, accounting for over 80 per cent of the market, was just around 6.7 per cent last year.