Even as the finance minister was expecting his carrot-and-stick approach to help keep a lid on cement prices, the differential excise duty structure announced would actually end up further increasing cement prices by Rs10-13 per bag.
“The government instead of curbing inflation has added to the price rise with this move. The prices are already above Rs200 per bag. An additional excise of Rs600 would mean a straight increase of Rs12-13 for every 50-kg bag,” says an official at the Cement Manufacturer’s Association.
A rise in cement prices could also affect the costs of homes and offices. Infrastructure projects like the plan to build massive highways connecting the metros of India too might face a rise in project costs, analysts fear.
“The cement prices are above Rs190 in most places. The incremental cost will be passed on to the end consumer,” says Manish Agarwal, general manager, treasury and corporate strategies for Gujarat Ambuja Cements Ltd.
“As the demand is higher than supply, the additional cost of excise duties will be passed on to the consumer,” says Harender Kumar, head of research ICICI Direct. As a result, say cement distributors cement prices are set to go up by Rs10 for a 50-kg bag in Mumbai and Rs12-13 in the interior regions.
The finance minister offered to reduce excise duties (tax levied on production) on cement to Rs350 per tonne from Rs400 per tonne (or Rs20 per bag) currently, if the manufacturers reduce the sale price to Rs190 per 50-kg bag (i.e. the same level as February 2006). But currently the sale price by manufacturers itself is close to Rs200 while the end retail price to consumers is Rs235-245 per bag in Mumbai—India’s largest cement market. If prices remain above Rs190 per bag the government will increase the excise duty by 50% to Rs600 per tonne (Rs30 per bag).
Manufacturers polled by Mint said that they will pass on the incremental cement cost to the consumers rather than restrict the price to Rs190 for a 12.5% reduction in excise duty. This is because freight costs in the last one year have gone up by 35-40% to Rs50 per bag. Manufacturers say the rising costs of coal used as fuel to make cement, too, restricts their ability to reduce prices.
Despite a further rise in prices manufacturers do not expect demand for cement to slow down in a sizzling real estate market and an economy where investments to build and expand factories is growing rapidly.R.G. Bagla, executive director of JK Cement says, “There is so much of infrastructure investment happening. Demand is very sound. That’s why we will be able to pass on additional costs to the consumers.”
On the stock markets, cement shares fell in the range of 5-9% as compared with a 4.01% fall in the BSE Sensex. Gujarat Ambuja fell 9.75% to close at Rs115.95, followed by ACC, which lost 6.35% to close at Rs900. India Cement shed 6.67% to close at Rs179, Grasim lost 5.13% to close at Rs2,212.6 and Ultratech lost 5.84% to close at Rs891.1.
“The stocks fell because this move will limit the price increase and restrict profitability of the cement companies,” a Mumbai-based analyst with a leading brokerage said.
The market capitalization of the companies too fell substantially. Gujarat Ambuja alone saw its value in the stock market fall Rs1,858.95 crore on Wednesday, followed by ACC which lost Rs1,143.15 crore. Grasim, Ultratech and India Cement lost Rs1,096.99 crore, Rs891.1 crore and Rs281 crore respectively.This means that all these companies have lost all the gains they had seen post presentation of the Railway Budget which announced some sops for cement companies.