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CCP again at odds with cement manufacturers

Besides the affinity of beginning with a C, cartelisation and cement have formed a strong bond in Pakistan, thanks to the added regulatory blows of another C - the Competition Commission of Pakistan (CCP). Bringing the critical issue of cartelisation to the fore again, the CCP raided the office of the All Pakistan Cement Manufacturers (APCMA) on Monday, accusing cement manufacturers of colluding to raise domestic prices of the commodity. And looking at the recent history of cement prices in the country, the steep rise in prices is hard to ignore (see graph). When representatives of the cement industry were approached by BR Research, they defended themselves, claiming that rising costs of inputs, including hefty utility charges and transport costs, have contributed tremendously to the rise in prices. They also argued that despite the rise in these input costs, cement prices have not risen as much as other commodities, such as urea. However, analysts claim that the current dynamics of the industry postulate the likely existence of a cement cartel. First, there is excess capacity in the sector, and capacity utilisation of the local cement industry is quite low. According to the APCMA, the capacity utilisation in 1HFY12 stands at slightly below 70 percent. The last time capacity utilisation was seen at a level lower than this was in FY02, when it was at nearly 63 percent. "The presence of excess capacity suggests that there is likely a cartel at play. Had everyone been playing even, cement manufacturers would have struggled to maximise their capacities. Its not just about input prices; some large manufacturers have not only reduced their costs by introducing energy-efficient options, but are also enjoying colossal profits," said Shahid Ali, Head of Research at MM Securities. Yet, cement manufacturers claim that slumping demand, thanks to the persistently subdued PSDP expenditures by the government, and rising input costs have already put several players, particularly small players such as Maple Leaf Cement, in jeopardy. One thing, however, is quite likely: CCPs allegations will have severe repercussions for the industry as financial charges on cement companies are likely to rise, and cement prices will also take a hit, even if temporarily. According to BMA Capital, "Historic trend shows that following every regulatory action by CCP, cement prices have taken a sharp fall followed by sectors profitability, as during FY10 cement prices fell by 28 percent year-on-year following a penalty imposition in Aug 09." Some professionals, who had been previously a part of the cement industry, admit that the CCP had rightfully taken action against the industry in the past, lending some credibility to the regulators move. However, other voices in the industry are also critical of the lack of timely decision-making on the part of legislative authorities. "Unless a decision is taken and implemented, whether it is in favour of or against cement manufacturers, laws will not be taken seriously in the country. The CCPs efforts will not be of much avail," said an industry professional on condition of anonymity. It is still relatively early to see what the impact of CCPs move will be on the cement industry of the country. It is likely, however, that cement prices may stumble, though only temporarily unless CCPs evidence concludes in a sound and timely decision reached out of the ensuing litigation.


 



 
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ICT 2014


Annual2013/14
Foreign Debt $61.805bn
Per Cap Income $1,386
GDP Growth 4.14%
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MonthlyOctober
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