Oct 04 2013 , Mumbai
Notwithstanding a hefty fine by CCI, cement makers are once again raising prices in tandem
It’s been a long monsoon this year, and cement demand is yet to pick up. But last month cement prices were raised by Rs 30-50 per 50 kg bag; and another increase of Rs 15-20 may come this month.
Lalit Kumar Jain, chairman of Kumar Urban Development and president of the Confederation of Real Estate Developers Association of India (Credai), grumbles, “When there is no demand, how can the cement makers make such drastic price increases within such a short time?”
The Competition Commission of India (CCI) last year gave the cement companies a bloody nose on the ground of price rigging. An encore is possible this year.
In 2010, the Builder’s Association of India (BAI) had complained to CCI that firms banded under the Cement Manufacturers’ Association to rig prices and control supplies in a cartel action. They were also accused of curbing output with deliberate intent to keep cement prices high.
What happened next was unprecedented: CCI heavily fined the cement companies. It said cement prices rose must faster than input prices and that the companies were using a centralised decision making system – a cartel, in other words. Demand, CCI said, did not justify the price increase.
Ten companies and the Cement Manufacturers Association of India (CMAI), fined a total of Rs 6,307 crore, approached the Competition Appellate Tribunal (Compat), and submitted 10 per cent of the fine. They are still awaiting its verdict.
CCI had laid bare the cement companies’ game by calling it “price parallelism” in the face of varying costs of each company. This, it said, was not possible without concerted action. Worse, they could not explain the low capacity use even when demand was high.
Penalties were slapped on ACC, Ambuja Cements, UltraTech, Grasim, Century, Binani, Lafarge, Jaypee, besides the industry lobby CMAI. The fine was 50 per cent of their profit in 2009-10 and 2010-11.
Mind you, the last has not yet been heard on that case yet, as Compat is yet to pronounce its decision, but the cement makers are already in another nasty spat with Credai over precisely the same charges as in last year’s case.
Credai’s Jain complains that cement firms are up to their old tricks. If they are running their factories at only 70 per cent due to low demand, why did they raised prices so much within one September week? he asks.
BAI’s general secretary Anand J Gupta intends to join force with Credai this time in taking cement makers back to CCI. He wonders at their daring: “The previous case is still going on at the tribunal, and the cement companies have again dared to act as cartel and raise prices. They have not learnt a lesson from the CCI fines.” The cartel, in the builders’ point of view, has struck back again.
Cement makers throw up their hands and blame the nation’s weak macroeconomic and the delays in projects that consume cement. The industry is staring at below 3 per cent demand growth for the second consecutive year. Pricing power is low in most regions and freight and raw material costs are on the rise. So bottom lines get squeezed.
This year, the industry says, prices were subdued for almost six months; and price started rising only in the last two weeks of September. Normally, the price cycle starts rising in August but the prolonged monsoon delayed the upward move.
“Demand is still low. Even rural demand has not grown as expected,” says a CMAI official, preferring to remain anonymous. As a result, capacity use is just 70 per cent. So, they raised prices. What else could they do? Small cement firms are in losses; and even big manufacturers, he says, saw significant profit erosion in April-June and July-September.
Average capacity use is low because of capacity additions and demand mismatch, explains Amey Joshi of India Ratings & Research.
The price increase, industry people say, is a compulsion. Vinita Lakshmi Singhania, MD of J K Lakshmi Cement, justifies the price rise thus: “There is absolutely no demand. Cement prices are rising due to rising input and diesel costs. Since demand is low capacity use is also low.” Input costs, she claims, are up by up to 50 per cent, but cement prices have risen by just 30 per cent. And, she takes care to point out, the prices even at the present levels, are lower than last year’s.
Like the rest of the economy, everyone is waiting for the elections, a time when money, more black than white, flows freely.
Singhania too wants to ride that wave and expects demand to revive on government impetus to infrastructure. “I hope things will improve from November-December,” she adds.
UltraTech Cement, ACC and Ambuja declined to comment. Privately their officials say the matter is ‘sensitive’. UltraTech and Ambuja did not reply to email queries. The ACC spokesperson said the company was about to announce results; therefore, “no comments”.
K Birla, CFO of UltraTech, did not go beyond: “Month- on- month demand is improving. September was better than August; August was better than July.” He too shelter behind the ruse that a board meeting for announcing quarterly results was on.
Vinod Juneja, MD of Binani, denies cartel action, merely blaming the cement price rise on a demand revival post-monsoon when construction activities picks up, as happens every year.
Rajesh Kumar Ravi, analyst at Karvy Stock Broking, says results of cartelisation earlier were different from now. Earlier cartels reaped profits as high as 70 per cent. Now profits are much lower.
Niranjan Hiranandani, MD of the Hiranandani group, is a bit equivocal: “One has to see if the cement companies have offended the law to increase prices…. Credai must be having data to support the cartelisation charge.”
According to an ICICI Direct report, cement prices rose in September despite sagging demand. The all-India average price rose, breaking the two-month downward trend that followed the yearly high of Rs 308 per 50 kg bag in June. In September it settled at Rs 299, up from Rs 293 in August.In the south price rise was Rs 26, taking the per-bag price to the year’s high of Rs 335. The west, which too saw steep increases, saw the average price rise by Rs 15 to Rs 309. In the north the price rose by Rs 10 to Rs 280. But the eastern and central markets saw continuous declines for three months.
Overall, demand is low recovery looks uncertain, except some parts of the north. With the reversal in pricing trend, the all-India average price is Rs 299, a rise of Rs 6. On a year-on-year basis, the price is up Rs 13. Dealers too warn that prices would continue to rise on demand recovery in certain pockets.
Cement despatches, however, do not match the recovery. Mangalam Cement, for one, reported that despatches in August 2013 were down a steep 16.1 per cent from the level a year ago. The company’s despatches have been declining since May. ICICI Direct says the price increases are meant to cover costs. At the all-India level, dispatches have grown minimally.
If cement is pricey, so are the cement companies. Rashesh Shah, ICICI Direct analyst, says the premium valuations of a few large-cap cement companies like Ambuja and UltraTech are unjustified. What keep their valuations high is higher replacement costs and market leadership.
Experts, looking into the short-term crystal ball, say the industry is still in for disappointment on the earnings front and the companies would remain under pressure.
“We expect both demand and pricing to improve going forward, but only marginally so, primarily due to a pick-up in rural demand. Profitability will come under severe pressure with earnings before interest, depreciation, and amortisation per tonne are projected to decline by close to 15 per cent in 2013-14,” says Ajay Srinivasan, director of Crisil Research.
India’s largest cement producers, the Holcim-controlled ACC and Ambuja Cement, saw big drops in profits. J K Lakshmi, UltraTech and Grasim also posted declines in quarterly net profit. The explanation is: lower than expected demand.
”Going forward too, the outlook remains cautious,” a senior official at ACC had earlier said of the company. According to him, to navigate the troubled times ACC is taking a number of initiatives to improve operational efficiencies and optimise distribution and logistics.
At Ambuja both quarterly sales and net profit were lower than a year ago. Other than subdued cement demand due to the overall economic slowdown, the early onset of monsoon has also added to the slowing of demand, according to Onne van der Weijde, Ambuja Cement MD. So this company too is focusing on operational efficiency and productivity to improve operating margins.
J K Lakshmi Cement’s Singhania reasons that unless infrastructure projects are implemented and demand from the real estate sector turns around, cement demand would continue to be under pressure.
According to an earlier statement of UltraTech chairman Kumar Mangalam Birla, the sector is witnessing stress, but would in the long term perform well once the infrastructure projects are revived.
Birla did not say this, but in the meantime cement users, as the construction firms say, would make the most of the cartel.