The saga of soaring cement prices

The substantial increase in the price of cement over the past couple of years has ruffled a few feathers in the country. The average price for a 5kg bag of cement in July 2010 stood at Rs.303; today it stands at Rs.425 with prices leaning towards Rs.470 in certain areas. Cement manufacturers point to the exponential increase in the price of raw materials used in the manufacture of cement as the reason behind the rise. The reliance on furnace oil has increased in light of increased gas outages in recent times, adding further to the cost of goods sold of cement manufacturers. Additionally, the industry is producing at approximately 70 percent of its capacity, as demand is bleak. 2011, however, has been a boon to manufacturers in terms of reduced duties and taxes on cement. As per the federal budget for the year 2011-2012, GST was reduced by 1 percent, Federal Excise Duty (FED) was reduced by Rs.200 per ton and there was a removal of the 2.5 percent Special Excise Duty (SED). This enabled savings of approximately Rs.22-23 per bag to accrue to the producers, none of which was passed on to the consumers. Rather, prices were increased across the board after the budget was announced. When cement prices over the past year are compared with coal price, the most significant factor in the cost of production for cement, over the past year, it is clear that cement prices have risen more so than coal prices. A rebased comparison of the respective prices has been presented in the accompanying graph. This has led many benefits to accrue to the manufacturers, evidenced by a stellar performance of these firms in 1HFY12. Lucky Cement and Attock Cement saw their profits double, while DG Khan Cement saw profits grow nearly six-fold on the heels of such prices. Net margins also improved across the board. Some analysts, however, believe the booming profits need to be seen in context. According to Furqan Ayub, an analyst at JS Global, current margins for cement producers are still not close to margins seen six years ago. Coal prices in the mid-2000s were hovering between $60 and $70 per tonne, electricity was much cheaper and borrowing costs were lower, enabling firms to post hefty profits despite charging less than the current prices. Unfortunately, for the manufacturers, the price increments have also attracted the attention of the Competition Commission of Pakistan, the authority entrusted with monitoring and taking care of anti-competitive practices. The CCP searched the offices of the APCMA in January and impounded documentary proofs of suspected cartelisation. Should the suspicions of the CCP be validated, the cement manufacturers can face a stiff penalty- though not for the first time. In 2009, the CCP fined cement manufacturers complicit in cartelisation Rs.6.3 billion, arguably the largest penalty in the corporate history of Pakistan. Since foul play is not new in the cement industry, players need to be watchful. The apex body for the cement producers, the APCMA, has published statistics regarding the increase in the cost of raw materials on its website, and the Chairman of the APCMA recently addressed journalists regarding price increases of building materials other than cement. However, this has not allayed all skepticism, especially regarding how producers dealt with the reduction in taxes and duties. Disclosure and justification of the treatment of these reductions by the manufacturers would go a long way in reducing the suspicions of regulators and consumers alike, vis-à-vis the cement price bonanza seen lately.