Duty cuts unlikely to cool cement prices, India

Duty cuts unlikely to cool cement prices, India
Published: 10 April 2007

Cement prices are unlikely to soften immediately following the lowering of import duties. Industry experts feel limited ports and infrastructure constraints can prevent cement prices from falling in the near-term.

On Tuesday, the government had abolished the 16 per cent countervailing duty and 4 per cent special additional duty on portland cement. Earlier, the Centre brought down the basic import tariff on cement to zero from 12.5 per cent but it had maintained the special tariff on imports.

Analysts are divided over the impact, with some estimating price cuts of at least Rs 23 per bag, while others are sceptical of immediate repercussions. However, it is likely that the operators along the coasts, such as in Mumbai and Gujarat, will feel the pinch. Gujarat Ambuja Cements and UltraTech Cements could be hit by the changes.

A Citigroup report said that the duty reductions may not lead to a drop in prices in the near-term, since there is a shortage of cement which necessitates imports.

“Secondly, given the infrastructure constraints, it will be difficult moving cement from the coast to the interior markets, effectively restricting the imported cement to the coastal markets. The limited number of major ports is also another constraint,” the report said.

Citigroup said while cement was currently not being imported into India, the theoretical landed cost of the commodity will decline from Rs 242 per bag to Rs 213 per bag. Citi analyst Pradeep Mahtani feels though imported cement will become more attractive in the new duty regime, the biggest constraint to imports is the lack of infrastructure facilities at the ports to handle bulk cement.

He added that though capital expenditure on such infrastructure is not prohibitive ($30 million), the key is in finding a site with deep-water facilities. This could hinder the setting up of cement terminals along the coast.

According to the brokerage, factors preventing a near-term surge of imports are delays in certification by the Bureau of Indian Standards, availability of cement only during the monsoons and limited number of ports that facilitate imports.

Moreover, users use the material in small quantities — about 3,000 tonnes per month — whereas an economical shipload is 25,000 tonnes.

The views of Citigroup is also supported by Rajan Kumar of Networth Stock Broking, who says though the duty cut will make imported cement cheaper by about Rs 32 per bag, lack of infrastructure and port handling facility will be a deterrent for imports in the short-term.

Kumar added that the development makes cement imports from Indonesia or China a real possibility based on the current domestic prices in the coastal region and cost of landed prices of imported cement.

It also makes some imports from Pakistan, which has become surplus in cement, a possibility even though the quantity may not be significant.