Indian rail freight hike to squeeze margins

Indian rail freight hike to squeeze margins
Published: 29 March 2007


Barely three weeks after they agreed to hold the prices, Indian cement companies are preparing for more cost hikes. This time it is a railway freight hike owing to a 6% busy season surcharge levied on the commodity. While the busy season surcharge during April-June has become a yearly phenomenon, this year cement manufacturers will feel the pinch because they can’t pass it on to the end consumer following the pact they made with commerce and industries minister Kamal Nath earlier this month.


The base freight rate for transporting cement for a distance of 400 kms is Rs 347.80 per tonne. The 6% busy season surcharge will mean an additional freight charge of Rs 20.87 per tonne, according to a circular issued by the ministry of railways. Around 50% of the total cement production is transported via rail, meaning cement manufacturers can’t escape the impact of the freight hike. "The same surcharge was levied last year also but then we had the flexibility to add it to the cost of the final product, now we lack that flexibility. Every the government department wants its pound of flesh-- first it was the excise duty hike and now a freight hike. And after all this we are expected to hold prices," said a senior official from a cement company.


Interestingly, with the government continuing to take a hard stance on cement price control, cracks are beginning to appear in the seemingly united front put up by cement manufacturers through the Cement Manufacturers Association of India. After months of resisting price control measures from the government, cement makers had finally caved in and promised to freeze prices at current levels for the next one year. But now some leading cement makers seem unlikely to toe the government’s line on price control.


"When there is no commitment from the government’s side on holding input costs, it leaves cement companies in a highly vulnerable position," said a cement industry analyst. Currently, cement prices across the country are in the range of Rs 200-255/bag, after factoring in the post-budget hike of Rs 12/bag.


The cement industry’s woes began in February this year when the government introduced a differential excise duty structure for the commodity in a bid to control galloping prices. This increase in duty on cement by Rs 200 per tonne when the retail price is Rs 190 or above. But the industry was able to pass on the impact of the duty hike by increasing prices by Rs 12/bag of cement. Noting that its move to curb price hike had backfired the government has now introduced additional controls.