Is cement price need to be regulated?

Is cement price need to be regulated?

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Harish Rao, Founder, Sawdust

Is cement price need to be regulated-min

Is cement price need to be regulated-min
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Though cement industry moved out of price control nearly four decades ago, the issue of price regulation is being re-visited time and again and in recent years the demand for price regulation has become little louder.  Often the cement manufacturers, in connivance with Cement Manufacturers Association, have been accused of indulging in ‘collusive price fixing’. Builders Association of India (BAI) in a complaint with Competition Commission of India had said that “cement manufacturers under the umbrella of Cement Manufacturers Association indulge directly and indirectly in monopolistic and restrictive trade practices, in an effort to control the price of cement by limiting and restricting the production and supply of cement as against the available capacity of production.” According to BAI cement manufacturers divided the territory of India into five zones so as to enable themselves to control the supply and determine or fix exorbitantly high prices of cement by forming a cartel in contravention of the provisions of Section 3 of the Act. BAI in its budget memorandum to the Finance Minister this year had strongly recommended the need for setting up a Cement Regulator. BAI feels that a Cement Regulatory Authority will help control the pricing and prevent cartelization by cement manufacturers and unfair practises.

In an investigation report prepared by the Directorate General on the direction of Competition Commission in 2010 had observed “The nature of product being almost homogeneous in nature facilitates oligopolistic pricing. Further, the cement industry has witnessed a lot of consolidation and concentration of market in the last decade. However, in terms of market power, none of the companies has the strength to operate independently.” The report had also observed that cement prices have risen faster than input prices since 2001.

Price rigging by cement manufacturers has been alleged by some state governments too though they haven’t demanded the setting up of Cement Regulatory Authority. For example, last year, Chhattisgarh government had stepped into regulate the cement price when it had moved up to Rs 250/bag in April-May from around Rs 210-15 per bag level. The state government then had capped the price at Rs 230 per bag. However, cement manufacturers in the state claimed that cement price in January 2017 had dipped drastically due to demand contraction post demonetization. And the prices reached their pre-demonetization level in April-May as the demand had picked up by then. Price at Rs 230 a bag is the lowest in the East India and manufacturers claimed that cement price is much higher in neighbouring West Bengal and Odisha.

Recently, cement suppliers in Telangana hiked their price while agreeing to supply cement to government projects at subsidised rate of Rs 230/bag! In 2014, former Chief Minister Jayalalithaa had started Amma Cement Supply Scheme to help lower and middle income groups purchase cement at subsidised prices.

However, according to an analyst with a foreign brokerage firm, controlling cement price through regulator is a retrograde step, especially when the government is trying to attract more investment into country’s manufacturing sector through programmes like ‘Make in India.’ ‘It will have impact on investment in not only cement sector but also in other sectors also,’ he said.

But why only cement price is to be regulated when construction uses other materials like steel too. For example, land cost forms almost 25% of the total cost of the building. The government has enacted an Act which prescribes minimum price to be paid for possessing land for industrial and commercial purpose.

A CEO of an Indian cement company said on the condition of anonymity “why only cement price need to be regulated? Why there is no demand for regulating price of newly built houses? Newly built house prices have not gone down in last 2-3 years even when unsold stock of housing units is mounting with leading builders? Is it not a case of price rigging?”

It is a known fact that price of cement (and for that matter price of any material) is based on demand and supply factors which not necessarily take into account cost of input. Also, price increase by one cement manufacturing company has contagious effect on other manufacturers too. But this problem is not specific to just cement industry but is prevailing in other industries too where product manufactured by the various manufacturers are homogeneous in nature. If the government bows to the pressure of consumers, that is, the builders, and sets up Cement Regulator it may lead to a bad precedent giving a chance for others to demand similar regulation in other industries too. This may eventually lead to going back to price control era of 70s and 80s.

And, if the cement price rigging is taking place we have institutions like Competition Commission to provide remedial measures which may act as deterrent for the industry to indulge in such malpractices. But setting up a regulatory authority may drive away new investments which will be suicidal for the country.