The ongoing spat with the government over cement prices may have been of the manufacturers’ own making. A pre-Budget document submitted by the Cement Manufacturers Association of India (CMAI), which gave a breakdown of how they arrived at the retail prices for cement, was based on figures for 2006, and not 2007, according to a CMAI official, who did not wish to be identified.
The break-up of costs and prices mentioned in the document shows that the retail price of cement works out to Rs3,212 a tonne or Rs160 for a 50kg bag.
The actual retail price for a 50kg bag, at the time the document was presented, was Rs212 (or Rs4,240 a tonne), 32% higher. Through the document, the cement manufacturers themselves gave the finance ministry the reason to believe that the amount they charge for a bag is Rs220.
Cement manufacturers and the government have been at odds ever since finance minister P.Chidambaram levied an additional tax on cement sold at a price higher than Rs190 for a 50kg bag. Most companies have chosen to pay the tax than toe the minister’s line on price.
India’s cement industry has cried itself hoarse over the past few weeks pointing out that the Rs30 a tonne reduction in price demanded by the finance ministry will bring down its revenues by around Rs8,700 crore. The ministry is convinced that Rs190 is the price it prefers for a 50kg bag of cement, and that anything higher leads to inflation. With wholesale inflation soaring (it was around 6.5% for the week ended 3 March), the ministry believes a reduction in the price of cement will help.
Still, the finance ministry’s line—that the increase in retail price of cement is driven by a desire for higher profit on the part of the companies and not by costs—may have some basis. An executive of a large Mumbai-based cement manufacturer said there had been a marginal increase in coal prices over the past year; a senior official at Coal India Ltd said that prices increased by 7-8%. Coal accounts for 16-17% of the cost of manufacturing cement. An input-cost-based price hike can account only for around 1.4% of the increase; manufacturers actually increased their prices by over 30% over the past year.
A CMAI official, who requested anonymity, admitted that the industry was able to hike prices on the back of strong demand.
Last week, a delegation of CMAI and senior executives from cement makers, including Anil Singhvi, managing director, Gujarat Ambuja Cements Ltd and S. Misra of the Aditya Birla Group, met Chidambaram. While the manufacturers agreed not to raise prices for a year, they refused to decrease them.
In turn, the minister is believed to have told them that the ministry was aware of the exact increase in their revenue and profit and that he would like them to come up with proposals on moderating cement prices.
“The industry is looking at adding a capacity of 110 million tonnes per annum (mtpa) on an installed base of 161mtpa to increase supplies over the next three to four years,” said the CMAI official. “But the FM refused to budge and kept saying ‘reduce the price.’”