The Hindu Business Line : Cement sector: Looking for relief on input costs, excise

The 2007 Budget saw unexpected moves to curtail the steady rise in cement prices. However, a tight-demand supply situation has seen cement prices continue to rise over the past year, despite these measures.

Cement manufacturers have witnessed strong sales and profit growth on the back of rising volumes and firm prices, though input costs have risen. The year ahead may be much more challenging for manufacturers as fresh capacities are commissioned, modera ting cement prices.

What happened last year

The 2007 Budget was negative for the cement sector. A dual excise duty structure was introduced, whereby cement sold above Rs 190 per bag was made liable for a flat excise duty of Rs 600 per tonne and cement priced below Rs 190 per bag was subject to a lower rate of excise at Rs 350 per tonne. This duty structure was then altered in May with the Government introducing a 12 per cent ad valorem duty on cement priced between Rs 190 and Rs 250 per bag. As a further measure to curtail prices, the Government also completely removed the import duty on cement early last year. This was expected to result in more imports and increase domestic supplies. However, actual cement imports remained limited due to infrastructure bottlenecks at the ports.

Recent months have also seen State governments taking up the issue of rising cement prices, with the Tamil Nadu Government recently indicating that private cement companies would be nationalised, if they didn’t temper prices. A proposal to supply a fixed quantity of cement at a subsidised rate of Rs 200 per bag to economically weaker sections has also been mooted and accepted by manufacturers in this State.

However, the dual duty structure as well as other measures failed to moderate cement prices during the year. Cement prices, which were hovering at Rs 200-220 per bag at this time last year, have seen an uptrend (though to a lower extent compared to the previous year) to current levels of about Rs 230-250 per bag, with the southern region recording the highest increase. Continued tight supplies of cement amidst capacity constraints, robust growth in demand and escalation in input costs saw manufacturers passing on the additional duty burden to consumers through price increases.

Financial backdrop

For the nine months period April-December 2007, the cement majors including ACC, Ambuja Cements, Grasim Industries, Ultratech Cement, India Cements and Madras Cement have reported a 24 per cent increase in sales and 38 per cent increase in operating profits. The margins have also expanded by a sharp 560 points with net profit jumping by 43 per cent.

There was, however, significant divergence in the growth rates recorded by the four regions. According to CARE data, in the nine months between April-December 2007, the western region recorded the highest growth in demand of 15.1 per cent, followed by southern and northern regions at 12.6 per cent and 11.1 per cent, respectively. The cement price per bag increased by 2.5 per cent in the western region and around 2.3 per cent in the north since last March. In the South, the price recorded a marginal growth hovering around Rs 250 per bag and in the East it remained stable.

The total cement capacity rose from 165.7 million tonnes at the beginning of 2007-08 to 173.23 million tonnes in December 2007. 32 million tonnes of new cement capacity is expected to come on stream in 2008-09 with much of it concentrated in the southern regions. This is expected to moderate prices, bringing relief to the consumers.

Expectations from Budget 2008

With realisations likely to flatten out, manufacturers will be looking to the Budget for relief on input costs as well as the incidence of excise duty. The cement industry has sought an abatement of 35 per cent for excise duty levy on cement and a complete waiver of the 5 per cent custom duty on coal, pet coke and other inputs.

Adding to this, a request has also been made to reduce the rate of VAT on cement and clinker from 12.5 per cent to 4 per cent and a re-imposition of the countervailing duty on cement import.

Thirty-five per cent abatement on MRP for excise duty levy would bring down the price of cement by about Rs 9 per bag, at prices of Rs 230 per bag. A waiver of 5 per cent of import duty on coal and other inputs to cement will also see a drop in the input cost of the manufacturers. Both measures could provide some relief for companies on the margin front. Fuel cost forms nearly 23 per cent of the total cost for a manufacturer like ACC, 33 per cent of total expenditure for Ultra Tech and 29 per cent for Gujarat Ambuja.

The already announced capacity additions by the industry, according to CARE reports, would put in nearly 10.72 million tonnes in the market in the coming quarter. If the Budget unveils fresh demand drivers for the cement sector such as increased expenditure on laying of roads or further tax concessions on housing loans, these could indirectly stimulate demand for cement. On the other hand, the absence of new demand drivers could prompt manufacturers to lower or hold prices, given that a more evenly balanced demand supply situation is expected next year.

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