Import duty cuts achieve little: prices hold steady

Import duty cuts achieve little: prices hold steady
Published: 12 February 2007

When the Union government reduced the import duty on cement from 12.5% to nil in the third week of January, the aim was to reign in the “runaway” cement prices. The expectation was that such a move will, at best, lead to a steep fall in cement prices currently ruling at Rs 220-230 per bag and thereby ease its effect on inflation (cement’s weightage in Wholesale Price Index (WPI) is 1.73105) or at the least, create a psychological effect that will rule out any further increase in retail prices.

A fortnight later, not a bag of imported cement has entered the country so far and worse, trade circles reveal that there has hardly been any serious enquiry by international players for shipping cement into India. The domestic cement prices continue to remain firm and in many regions across the country, it has even increased! If there was a fall, it was only in the stock prices of cement companies which dropped by 7% to 10% post-announcement.

It appears that the government’s game plan of lowering or removing import duties on those commodities whose prices have shot up is doomed to fail — at least in the case of cement.

That is reflected in the way the cement companies reacted to the announcement. One would have expected the industry to cry foul and run to the government seeking its restoration but that did not happen. Explains N Srinivasan, vice-chairman and managing director, India Cements Ltd and immediate past-president, Cement Manufacturers Association (CMA) “we took a stand that such a policy measure gave the industry an opportunity to demonstrate to the government that the notion that cement prices in India were too high is wrong.”

The FOB value per tonne of (bagged) cement in China, Thailand or Indonesia (closest markets) is $ 40. Considering the freight, levies and margins, the retail price could be about Rs 275 per bag in areas closer to the port and Rs 300 in the interior areas.

Apart from prices, there are logistics issues as well which make cement imports difficult. None of the ports in India are equipped to handle bulk cement. Importing bagged cement is costlier. There are distribution issues too.

The cement market today is brand conscious and selling an unknown brand can only be at a steep discount to the prevailing price. Also, no distributor is going to stick his neck out and sell imported cement and earn the wrath of established domestic players. Direct users can import cement a trifle cheaply but infrastructure issues will dog them too. It is not without reason that not a bag of imported cement has entered the country in the last 20 years.

Cement Wars

• No rise in cement imports despite reduction in duty from 12.5 to nil
• Prices not declining despite the domestic industry functioning at almost 100% capacity
• Prices expected to decline only when bulk capacity kicks in around 2008-09
Another reason for the prices not declining is the domestic cement scenario. Unlike in the past when the cement industry was accused of regulating supply to meet demand, there is no surplus cement now despite the industry working at almost 100% capacity. CMA statistics reveal that in December the industry produced 13.46 million tonnes as against its monthly capacity of 13.75 million tonnes, a capacity utilisation of 98%.

During the April-December-06 period the average capacity utilisation was 91% (this figure could be higher if dormant capacities are removed). “Demand, today, is such that we are rationalising supplies to various regions. “What is produced is sold immediately and we are forced to say no to orders at times,” Madras Cements executive director-finance A V Dharmakrishnan said.

What can end the cement industry’s party? The upcoming capacity expansions can, if they come to production at the same time. Over 50 million tonnes of fresh capacity has been announced over the next four to five years. Some analysts however disagree.

They argue that with the industry growing at 10% per annum, it needs to add around 17Mt every year to meet demand and the cement from various expansion projects would be absorbed. One thing is certain — the party is set to continue till 2008-09 before bulk of the capacities come in.

Interestingly, the government order removing the import duty on cement also reduced customs duty on capital goods for the cement industry from 12.5% to 7.5%. With almost all cement companies in the process of expanding their capacities, they actually stand to gain! This also explains why the industry is not complaining loudly about the government decision.