Cement Spike May Hit Your Roof

THE FINANCE MINISTER’S proposed differential duty structure on cement to rein in prices of the commodity may backfire as cement prices are likely to go up by at least Rs 11.82 per bag with immediate effect. Since the duty is being charged on the retail price, manufacturers are looking to pass on the burden of increased excise duty to the end consumer.

Excise duty on cement, now at Rs 408 per tonne, irrespective of the retail price of the commodity, may rise up to Rs 612 per tonne if the retail price exceeds Rs 190 per bag. The duty may be lowered to Rs 350 per tonne if the maximum retail price is Rs 190 or lower, as per the Union Budget proposal.

Cement prices are currently hovering around Rs 200-250 per bag, on an average, across the country. They have risen 50% in the past 18 months.

An upward revision in cement prices will hit the construction sector the hardest as cement constitutes 13-20% of the input cost in various construction projects. Cost of infrastructure, road and housing projects will go up with an increase in cement prices.

“We will have to pass on the impact of increased cement prices to the consumer. Housing and real estate will cost more, while the toll on bridges and roads will also go up,” said a spokesperson for the National Builders’ Association.

In the current market situation, where cement demand is fairly price-inelastic, industry players can afford to pass on the entire burden of increased excise to consumers.

But cement companies are unhappy with the differential duty structure, as it is the only sector singled out for price control.

Industry players feel that the premise on which the price control is based is flawed as cement prices have gone up only 6% on a compounded annual growth rate basis in the past 10 years and the cement sector’s contribution to the overall inflation in the economy is negligible.

“We pay Rs 52 as direct and indirect taxes on every bag of cement, while our profit is Rs 21 per bag. Obviously, tax is the biggest component in the selling price and the way to control prices is by reducing taxes and increasing supply,” said DD Rathi, wholetime director and CFO of Grasim.

Mr Rathi also said the government’s attempts to control prices may act as a disincentive to the capacity-strapped sector. “Why will people increase capacity if the prevailing prices are not lucrative,” he wondered.

The cement industry has been faced with a supply constraint as the current capacity at 155 million tonnes has proved insufficient to meet rising demand from the infrastructure and housing sectors.

Large-scale expansions have been planned in the sector to increase capacity by another 60 million tonnes in the next two-three years. Industry experts predict that the sector will require an additional 90-100 million tonnes in the next five years to meet demand, which is growing at 10% per annum.

Cement stocks tumbled on the exchanges on Wednesday with ACC slipping 6.35% to Rs 900.05, Gujarat Ambuja down 7.76% to end at Rs 115.95 and Grasim losing 5.13% to Rs 2,212.60.

“The market will take an unfavourable view of cement stocks in the medium term as the sector’s capacity to raise prices has been diminished by the excise duty hike,” said a Mumbai-based analyst.

SOURCES:
Economic Times