cement firms to be effected by price control

Cement companies' latest quarterly performance shows that they have begun to feel the pinch of the government's anti-inflationary measures.

The latest price cut of 1.5 to 3 per cent at the government's persuasion and a decision to hold prices for the next three months could impact earnings even more.

An analysis of the 2007-08 fourth-quarterly performance of major manufacturers points to the lower profitability over the corresponding quarter of 2006-07.

Compared to the steep rise in net profit in Q4 2006-07, the corresponding quarter of 2007-08 has seen either significantly slower growth or a fall for all the companies concerned.

The trend change is primarily due to the inability of cement companies to increase prices since April 2007 despite an increase in raw material and fuel costs.

Over the last one and a half years, the government has taken several measures to check cement prices to control inflation, which has mostly stayed above the central bank's target level of 5 to 5.5 per cent.

The latest restrictions have been an export ban and a 12 per cent ad-valorem duty on cement selling above Rs 250 per 50 kg bag.

Last year, the government made cement import duty free. Cement has a weight of 1.73 per cent in the wholesale price index (WPI).

"Continuous government intervention has resulted in an uncertain price environment, which together with a significant increase in input costs will have an adverse impact on margins," an Ultratech Cement release said.

According to ACC, India's largest cement producer, production costs went up 12 per cent during the quarter due to significant cost pressures in respect of major inputs such as coal, gypsum, power, freight and so on. Coal prices alone increased around 31 per cent.

"Despite all these unprecedented cost-push factors, the company absorbed most of this escalation and our cement prices went up by only 3 per cent quarter-on-quarter," an ACC spokesman said.

The cement industry added a capacity of 10 million tonnes in 2007-08, taking total capacity to 175.6 million tonnes. According to the Cement Manufacturers Association (CMA), the industry is likely to create an additional capacity of 32 million tonnes in 2008-09.