Cement units bet on good monsoon

By Ramnath Subbu

MUMBAI, JUNE 9. The Indian cement industry which had drawn flak in the recent past due to allegations of cartelisation, following a spurt in prices, is coping with many problems. The industry has been hit by cost pressures and lower growth in volumes but companies tried to increase their margins by resorting to cost cutting measures.

According to Mr. A. K. Jain, president, marketing, ACC, and a spokesman of Cement Manufacturers Association (CMA), ``The last 8-10 months, the primary concern for the industry has been the slackness in demand. Some improvement has been there in April and May but it is still far below normal demand levels in these months.''

The demand for cement in 2000-01 was around 93 million tonnes as against 94 million tonnes in the previous year and manufacturers reported a lower capacity utilisation of 82 per cent for the year ended March 31, as against 87 per cent in the previous year. Last year, particularly the second half, witnessed a sharp fall in demand following drought in some parts of the country. Water shortage had affected construction activities in rural areas. In spite of surplus capacity, the industry is slowly moving towards achieving a demand-supply balance with little investment in greenfield projects expected in the next two to three years.

Industry sources say that current prices per 50 kg bag in Delhi are now around Rs. 140 against Rs. 145 last month, in Chennai the price is around Rs. 175-180 per bag (Rs. 185), in Kolkata it is around Rs. 160 and in Mumbai prices are steady at around Rs. 175 per bag. According to the Cement Manufacturers Association, in December 2000, prices in Delhi were Rs. 165 per bag, Chennai Rs. 185, Kolkata Rs. 170 and Mumbai Rs. 185. So there has been some reaction in prices after the jump.

Regarding allegations of cartelisation, Mr. Jain said there had been a lot of misunderstanding. ``Cement is a commodity and prices rise and fall together for all producers. The impression therefore is that there is a force working behind their movement. But that is how commodity prices move and there are, at times, large movements in price at times of a small surplus or shortage. What is important is to look at long term trends. Prices are, in fact, far below the earlier levels. In the last five years, there has been a significant cost-push.''

According to the CMA, ``Cement prices follow a pattern typical of any commodity. Depending on the market situation, commodity prices tend to move up or down to a common level. This tends to give an impression as if the suppliers are acting in concert but is really the reflection of the intensity of competition and the dynamics of the commodity market. This type of price behaviour is seen in steel, aluminium, polymers, and heavy chemicals.''

The CMA says ex-factory cement price in India is the cheapest in the world. Further, during the last nine years, input costs of major components have risen between 100 per cent and 220 per cent. Also, cement is one of the highest taxed commodities in India with levies up to 25-30 per cent of its price.

Cement is a highly capital intensive industry and unless companies earn return on capital, there can be no fresh investments. Unlike commodities such as steel, cement is cheap and most countries try to be self-sufficient. The Indian cement industry is the second largest in the world with an installed capacity of 113 million tonnes.

``The demand in Gujarat has gone up after two years. Last year, in States such as Uttar Pradesh where demand is around 12 million tonnes, there was a 2 per cent drop against a 30 per cent rise in the previous year. If the demand picks up this year, the impact would be good,'' said Mr. Jain.

Export of cement last year was significant at around five million tonnes against 3.5 million tonnes in the previous year. ``Exports take care of only surplus. When domestic demand was down, exports went up. Countries all over Southeast Asia export their surplus at marginal prices,'' said Mr. Jain.

Some initiatives have been suggested by the industry to improve demand. ``In housing, a number of steps have been taken in the last two budgets - incentives for personal housing but there has been no efforts in terms of government spending. The construction sector essentially stimulates the economy and has the maximum spin-offs and trickle down effect. So more needs to be done in this segment.'' said Mr. Jain.

In terms of infrastructure, the roads sector has the largest potential and the industry has been pleading with the government that the highways the National Highway Development Programme (NHDP) and Golden Quadrilateral connecting North to South and East to West be laid in concrete. ``The life cycle cost for concrete roads is lowest and although the initial costs are high, these can be brought down. Also, the World Bank and funding bodies have stipulated that the funded projects be in concrete rather than asphalt which has a foreign exchange component as crude - the raw material is imported,'' Mr. Jain said.

Cement demand is expected to grow at 8 per cent in the current fiscal from a negative growth of 1.5 per cent last year. But cement prices are likely to remain stable at current levels. According to Mr. Jain, ``We are hopeful of a good monsoon so that in the second half of the year, there would be better demand. Also from the roads sector concrete demand will have a better conversion in the second half. For now, 1,500 km is being done in concrete and the demand for this is four million tonnes, the benefit of this would start flowing in from October.''

Send this article to Friends by E-Mail

Section  : Business
Previous : Yamaha to double motorcycle sales
Next     : Alcatel bags VSNL order