Cartelisation and the cement industry

Cartelisation and the cement industry

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Cement manufacturers point out that cartelisation usually happens when there are entry barriers and in case of cement manufacturing there are no entry barriers. Anybody can set up cement manufacturing units, provided commercial viability is established. Therefore, it is wrong to say that in the industry there is cartel among the manufacturers

Cement manufacturers have often been accused of forming cartels to rig the commodity’s price up. Consumers of cement, mainly consisting of builders, have been complaining about the price rigging by the cement manufacturers by forming an informal cartel which has been time and again denied by the industry.

One of the factors which commonly lead us to believe the existence of the cartel is the fact that top five manufacturers control more than 50% of the market. And top ten manufacturers control more than 75% of the market. In a case filed with the Competition Commission of India (CCI) against 11 cement manufacturers in 2011, it was pointed out that cement prices went up soon after the meeting of the Cement Manufacturers Association.

The CCI on examination of the available data made the following observations in 2012 against cement companies:

  • The Cement Manufacturers Association (CMA) was the platform of cartelisation;
  • Cement manufacturers simultaneously increased cement prices just after association meetings;
  • Capacity utilisation (total capacity achieved) and production were reduced in a coordinated manner and not according to the market forces;
  • A similar pattern of dispatch was observed among the cement manufacturers during November 2010;
  • Cement manufacturers earned super-normal profits or abnormal profits.

Cement manufacturers argue that the cement being a commodity product, the price parallelism is an expected and natural characteristic of pricing patterns, as producers compete with each other mainly on the basis of price. Since similar demand, supply and cost factors affect all the producers (including the seasonality of the product), production and dispatch parallelism is an expected characteristic of the Indian cement industry.

Cement companies argue that how much of the cost increase can be passed on to the consumers depends largely on the characteristics of demand. In the case of a product such as cement, where there is significant short-run volatility in demand, prices that consumers are willing to pay will depend on their immediate needs (especially given the fact that cement cannot be stored). Therefore, cost increases can be passed on to consumers in the short-run only when demand is high. However, in the long-run, cost increases can gradually be incorporated into prices.

Cement manufacturers also point out that cartelisation usually happens when there are entry barriers and in case of cement manufacturing there are no entry barriers. Anybody can set up cement manufacturing units, provided commercial viability is established. Therefore, it is wrong to say that in the industry there is cartel among the manufacturers. Cement manufacturers also point out substantial capacity addition between 2007 and 2011 when the manufacturers were accused of jacking up the price. Installed capacity was increased during the period 2007-2011 from 179.1 MT to 286.38 MT i.e. almost 50% increase.

Cartel or no cartel it is a common knowledge that cement prices like other building materials go up or down in tandem. It happens in steel, ceramics, etc and also in cement.

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