Caring for cement

Seven years ago, cement prices in Delhi ruled at around Rs 143 per 50-kg bag. Today, they are 9 per cent lower at Rs 130.

Compare it with the 55 per cent rise in the consumer price index in this period and an equally steady increase in the prices of coal,  power and diesel (all of which are key inputs required to produce and sell cement), you will realise why the cement industry is complaining today.

Improved efficiency, technology and operational cost-cutting have helped, but the overall impact on the industry's bottom line has been adverse.

But that is not the only reason for the cement industry's current woes.

What bothers it more is the modest four per cent growth in sales volume it has seen in the first half of the current financial year. It has caused concern because many other manufacturing industries have clocked higher growth ranging between eight and ten per cent in this period.

Worse, the construction industry which is a big consumer of cement has grown by 10-12 per cent.

So, why is cement not growing?

There are no easy answers to this question. Conventional economics has it that one per cent growth in the gross domestic product should result in a 1.5 per cent sales spurt in the cement industry.

And if the finance ministry wants us to believe that the Indian economy is poised for 7 per cent growth in its GDP this year, then the cement industry should be growing by at least 10.5 per cent.

Going by the trend so far, there is no sign of that happening.

Take a look at the second quarter results of the top private sector cement companies,  the picture appears even murkier.  As many as six out of the eleven companies, accounting for about 85 per cent of the industry's total capacity of 141 million tonnes, incurred post-tax losses for the second quarter ended September 2003.

And those that did manage to keep the red ink out of the balance sheet could not clock a net profit of more than 3-8 per cent of their total sales.  So, it is not just a question of selling more, even staying in the black is becoming a problem.

The cement industry's capacity utilisation also has declined to 78 per cent.

There is no pick-up in cement demand in an economy, which otherwise seems to be 'shining'. The role that the cement industry can play in strengthening the infrastructure sector is unquestionable.

But the per capita use of cement in the country is just around 100 kilogram, way below over 300 kilogram in China. The huge gap continues although the Indian cement industry is the second largest in the world, next only to China.

Experts point out that substantial damage was done to the cement industry this year when the finance ministry increased the excise duty on cement.

Today, the specific excise duty (Rs 400 per tonne) amounts to about 30 per cent of the current ex-factory price of cement. There is no other industry, which produces a vital input for the infrastructure sector and is yet taxed at this high rate.

Add to this the royalty charged on limestone (at a rate higher than what is levied on iron ore),  sales tax, octroi, electricity duty etc., the total burden of taxes on a tonne of cement goes up to as high as 80 per cent of its ex-factory price.

There is no respite even for those units which would like to import non-coking coal, where the customs duty was increased from 15 per cent to 25 per cent three years ago.  Such a duty structure is also a hindrance to exports, currently estimated at only 7 million tonnes.

Cement industry representatives will obviously like the various duties to be reduced or rationalised by the Centre as well as the states.

But the problem they face is peculiar. A few rounds of meetings with some officials in the finance ministry have given them the impression that there is no one in the government who is listening to them or is actually interested in ensuring that the cement industry should grow at a higher rate.

It is possible that the cement industry has failed to put together a powerful lobby to espouse its cause.

But what is of concern is that the government also has so far failed to recognise the need for giving the cement industry the required policy support.

The right answer may not lie just in fiscal concessions. The government also needs to check why the prime minister's rural roads project has not taken off as per its original plan.

If and when it does, the cement industry will certainly see a pick-up in demand,  for rural roads need to be made of cement concrete.

In addition, there is the need for giving the rural economy a big boost. For, that alone can step up construction activities in the villages which should see a rise in cement demand.

A thriving cement industry is an unequivocally positive development for the Indian economy. The government should be conscious of this.

Powered by