Mumbai: Cement prices have dipped around 6% since June when the Competition Commission of India (CCI) penalized 11 companies at least Rs.6,000 crore, accusing them of cartelization. A slowdown in new construction is also contributing to the drop in prices, which have been volatile this year, analysts and cement dealers said.
CCI is expected to take the penalty order, which has been challenged by the companies, closer to resolution in January. Prices may rise if the Reserve Bank of India cuts its key policy rate early next year as that may spur demand for new homes and offices, analysts said.
“Cement supply discipline seems to have weakened as is evident from increasing volatility in cement prices,” said Rakesh Arora, research head at Macquarie Research India. “Cement demand has been inexplicably weak and that has also weighed on pricing power.”
Cement prices peaked to their all-time highs earlier this year at around Rs.330 a bag, a dealer in Mumbai said.
After an acute shortage in supply around mid-year, CCI investigated the market on complaints from the Builders’ Association of India. On 21 June, the government announced that it had imposed a fine, at the rate of 0.5 times profit for the years 2009-10 and 2010-11, for violation of the Competition Act, 2002, which deals in anti-competitive agreements including cartels.
“It was like an artificial rise in prices in June and July—after that the CCI fine came,” said Paresh (who uses only one name) of United Cement Suppliers, a cement dealer that supplies to Maharashtra, including Mumbai. “The talk was that there was an artificial scarcity in the market.”
The 11 cement companies— ACC Ltd, Ambuja Cements Ltd, Ultratech Cement Ltd, Grasim Industries Ltd (now merged with Ultratech), J.K. Cement Ltd, India Cements Ltd, Madras Cements Ltd, Century Cement, Binani Cement Ltd, Lafarge India and Jaypee Cement—did not respond to emails.
These companies were also contacted on the phone. Some of them said their key officials were on leave, some said they would not comment and others did not answer phone calls.
A senior JK Lakshmi Cement Ltd executive said prices were being guided more by the slowdown in the economy and seasonal factors, and the fine did not play a role in the volatility.
“The fall in prices is linked to the demand and supply scenario. Prices fell in November and December due to a late Diwali as the workers took time to get back to work,” said Shailendra Chouksey, whole-time director, JK Lakshmi Cement.
The fine had no direct link to prices, which only started falling in November and December, Chouksey said. JK Lakshmi is not one of the 11 companies that was penalized.
India is the world’s second largest cement producer after China and is set to consume 223.8 million tonnes (mt) of the material this calendar year, according to Kotak Securities. The research house estimates that in 2015, India’s cement consumption will rise 27% to 284.5mt.
The industry, with about 462 cement plants, is facing rising challenges such as input costs—mainly rising coal prices, poor transport infrastructure and a controversy over allocations of coal blocks.
“We expect demand to grow by 8% and 8.5% during FY13 and FY14, respectively, and expect capacity utilizations to improve from 77.3% in FY12 to 80.5% in FY14 and 84% in FY15 for the industry as a whole,” Kotak Securities said.
2013 may spell change
The industry is expecting a reversal in prices in January as the busy season for construction kicks in and a likely cut in interest rates may boost consumer spending, analysts and dealers said.
“If interest rates are cut, there could be a recovery in prices,” said Paresh of United Cement Suppliers. “If interest rates are not cut, there is still a chance cement prices could rise if builders offer discounts to boost sales of buildings.”
JK Lakshmi’s Chouksey expects a Rs.15-20 per bag rise in January with “relatively better” trends in despatches already visible this month.
The CCI hearing on 29 January could provide more clarity on how soon the fines will be resolved, analysts said.
If the penalties are upheld, “this can weigh on the sentiment and impact stock price (of the companies) by 10-20%,” Macquarie’s Arora said.