Tuesday, July 31, 2012

Competition Commission penalty detrimental to cement industry: Analysys

Mumbai Much Much attempts to analyse the cement industry scenario and the impact of CCI imposing a penalty of Rs 6,300 crores on 12 companies and CMA:

The cost of making cement in India has jumped by half over the last four years, and the rising prices of raw materials, energy and freight all indicate that manufacturers have a tough job on their hands to keep their plants ticking.
Ironically, almost all the costs related to the production of cement and its transportation are the monopoly of the government, leaving companies with no elbow room to control these factors. Adding to the problems, the growth in demand for cement has lost momentum due to the sharp slowdown in economic expansion.
Cement is a bulk commodity and it needs to be shipped across vast distances to reach the consumer. Freight makes up a little more than a fifth of the total cost of cement. It has climbed more than a quarter on a compounded annual growth rate over the past seven years. This includes transportation costs of clinker, but excludes freight on raw materials which is usually added to the cost of raw materials. 
So, the 30 per cent hike in freight rates in the March railway budget meant a stiff increase in costs. To move a 50 kg bag of cement from Andhra Pradesh, a key producing state, to Maharashtra the new rail freight rates added Rs.15 to each bag; to Kerala Rs.22 and as much as Rs.30 to the north east.
Because the railways are state-owned and freight rates set by the government are not negotiable, cement producers have been using the improving highway network to move cement via road. About 35 per cent of cement produced in India is today carried by the railways, down from more than 60 per cent until a decade ago.
The railways are expected to ship at least 30 per cent of the cement in the years to come, given its predominance over longer distances. The economic size of a cement plant has risen to 5 million tonnes a year from 1 million tonnes, meaning larger long haul costs to get the stuff to the ultimate buyer.
It’s only a matter of time before the government raises diesel prices. This would have the potential to balloon transportation costs further. Again, this is out of bounds of cement producers.
The two other major costs are energy and raw materials. Stable supplies of power and coal, also mostly controlled by the state, have always been a challenge. In the absence of competition, the coal produced by government-run mines is of poor quality with high ash and low calorific value.
As a result, cement companies also depend on imported coal of high calorific value. However, the rupee’s sharp depreciation and Indonesia’s – a major coal supplier – recent moves to jack up prices and restrict exports pose huge risks to costs. 
All these factors have resulted in a sharp rise in the cost of building a new cement plant over the past two years. With prices not keeping pace with the increase in input and other costs,  EBITDA (earnings before interest, tax, depreciation and amortisation) have plummeted to $1,000 per tonne from a greenfield cement plant, compared with $1,500 that was initially expected.
It is against this background that the punitive fines of Rs.63 billion imposed on 11 cement companies by the Competition Commission of India must be viewed. 
Although the penalty for alleged cartelisation is being appealed in a higher tribunal, the stated objective to control pricing without taking into consideration costs and slowing demand is bound to cause more harm.
India is the world’s second biggest producer of cement after China, with output soaring after the sector was completely decontrolled in 1989. But the emerging scenario is detrimental for the industry and the country. 

Monday, July 9, 2012

'You can't blame cement industry for high cost of construction'

NEW DELHI: A debate is raging among business and industry circles as to whether the cement industry alone can be blamed for the increasing cost of construction?

Analysts say cement cost is forms just about 10-15% of the overall construction cost. The rest is contributed by costs of other inputs like land, steel and even sand, apart from the ever increasing cost of labour.

It is in this context that one has to view the heft Rs 6,300 crore penalty slapped by the Competition Commission of India on eleven cement companies.


Saturday, July 7, 2012

CCI order on cement: 'Punishing performers to Perish'

MUMBAI, July 07, 2012: The Competition Commission of India’s recent order on eleven Indian cement companies imposing a whopping Rs 6,000 crore penalty for alleged cartelization is bound to have a crippling the industry – the world’s second largest after China - leading analysts said.

"It's a classic case of performers being punished,” said Mr Sudip Bandyopadhyay, MD and CEO of Destimony Securities. 

“In some cases the penalty imposed is higher than a year’s earning for many players and this could negatively affect the health of the company jeopardizing shareholder interest,” Mr Bandyopadhyay said and wondered: “Penalty seems to have been imposed on circumstantial evidence and not on the basis of concrete proof of cartelization.”

“As it is, the Indian economy is already suffering from negative developments on account of retrospective amendment in the Income Tax laws and the reverberations of the 2G scam. Further, penalties on core sectors like cement will weaken the FII confidence, as well as that of the domestic investor which will go on to hamper growth and destabilize the economy even further," he added.

The Competition Commission of India had imposed penalty of over Rs 6,000 crores on 11 cement manufacturers based on a complaint filed by Builders Association of India. The Commission has also imposed penalty on the Cement Manufacturers Association

In its report titled "CCI bites hard; Industry ready to fight back", Anand Rathi Share and Stock Brokers Limited says the order is largely based on “circumstantial evidence and less concrete or direct evidence” for an industry with a relatively large number of players.
Emkay Global Financial Services Ltd said in its report after analysing the CCI order that “Though some of the evidence presented by CCI could be strong, we believe they may not be strong enough to prove the charge of cartelization.”
“Collection and circulation of data by CMA has been considered as anti-competitive practice. However CMA has argued it collects data under instructions from DIPP for computation of wholesale price index and, hence, no adverse inference can be drawn from this. Further, data collection and dissemination activities of CMA mentioned by CCI are pretty much the activities carried by any trade/business association,” Emkay said.
“We also observe that CCI has provided strong circumstantial and statistical evidence like date and venue of CMA’s ‘High Power Committee’ meeting and subsequent movement in cement prices indicative of coordinate price actions by cement manufactures. However the limited period and price analysis of such meetings and that too for specific season (particularly construction season when cement prices usually witness seasonal up tick) could lead to lot of subjective inference and weakens statistical assessment. For eg .Commission gave instances of CMA meeting held on Jan-11, Feb-11 and April-11 and no specific explanation of why only these three meetings have been referred to when meetings of its High Power Committee take place periodically,” it added.
According to BRIC Data, an emerging markets intelligence company, India is ranked as the second-largest producer of cement in the world, only behind China. The Indian cement industry increased in value at a compound annual growth rate (CAGR) of 13.14% during the review period (2007–2011), and is projected to grow at a CAGR of 10.64% over the forecast period (2012–2016). This growth is primarily attributed to the government’s high level of infrastructure spending, and the country’s increasing number of residential and commercial construction activities, BRIC Data says.
The Indian government invested US$500 billion on infrastructure during the Eleventh Five-Year Plan (2007–2012) and revealed plans to invest a further US$1 trillion on infrastructure during the Twelfth Five-Year Plan (2012–2017).
The large-scale investment on various infrastructure projects, including roads, railways, bridges and ports, will generate a huge demand for cement over the forecast period, BRIC Data says.
Credit rating agency CRISIL said the penalty on the four CRISIL-rated cement companies is unlikely to impact their credit quality. “CRISIL believes that the financial risk profiles of these cement manufacturers are strong enough to offset the impact of the penalty. The penalty is sizeable at 75 per cent of the aggregate net profits of the four rated cement players for 2011-12 (refers to financial year, April 1 to March 31),” the agency said.
CRISIL, however, said robust liquidity and low gearing will cushion the credit risk profiles of these companies against the impact of the penalty. Moreover, cash outflows on account of the order are unlikely immediately, given that the players may appeal against it at the Competition Appellate Tribunal.
“The credit risk profiles of these companies are, therefore, expected to remain unchanged in the near term,” it said.

Monday, July 2, 2012

Call to arrest 'fishy' Indo-Pak detentions

MUMBAI, July 02, 2012: A group of civil society members have sent a memorandum to the Government to requesting it to take up the issue of fishermen languishing in Pakistan jails and get teir boats also released.
A group of Indian fishermen returning home after years of detention in Pakistan
In a communiqué to External Affairs Secretary Mr Ranjan Mathai, the civil society members have called for discussing the issues during his forthcoming meeting with his Pakistan counterpart Mr. Jalil Abbas Jilani in New Delhi on July4 and 5.
The civil society appreciated the Pakistan's gesture by releasing 311 Indian fishermen including 20 minors. The release became reality after the meeting between Indian Home Secretary Mr. R K Singh and Pakistan's Interior Secretary Mr. K M Siddiq Akbar held in Islamabad on 24-25 May 2012.
“We have been told that they discussed the issue of releasing fishermen who have completed their sentences along with their boats. Even after return of 315 Indian fishermen, there will be about 130 Indian fishermen in Pakistan’s prisons. More than 745 Indian fishing boats are with Pakistan. Similarly, Pakistan’s around 120 fishermen are in Indian prisons and their about 100 fishing boats are in India’s possession,” the memorandum said.
“As both of you will be discussing issues like Peace and Security including CBMs and promotion of friendly exchanges, we would like to highlight issues affecting traditional fishermen of Gujarat and Diu, whose number runs into lakhs. We request you to kindly address the following issues of fishing communities,” the signatories said.
They have also called for a permanent resolution of the issue is urgently required and till that time both the Governments should pursue a policy of no arrest.
This strengthen the peace process and will play a major role as a Confidence Building Measure If both the Governments agree to address the concerns of fishing communities.
The signatories to the memorandum are: Jatin Desai (Journalist- Mumbai), Arjun Modhwadia      (President, Congress-Ahmedabad), Vrinda Grover (Lawyer -Delhi), Bharat Modi  (Fisherman –Porbandar), Varsha R Berry  (Peace Activist – Mumbai), Deenadayalan (Peace Activist –Bangalore), Ritu Dewan (Professor - Mumbai), Neera Adarkar (Architect  -Mumbai), Mazher Hussain (Peace Activist- Hyderabad), Haris Kidwai (Peace Activist  -Delhi), Manisha Gupte (Peace activist- Pune), Asad Bin Saif (Peace Activist –Mumbai) and Sanjay Nahar (Peace Activist - Pune).