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TODAY'S PAPER TAMIL NADU

April 23, 2008

Cement prices go right through the ceiling

K.T. Jagannathan

Rising input costs, voracious demand and duty structure pile up pressure

CHENNAI: Skyrocketing cement prices, combined with hugely expensive land costs, are threatening to put housing beyond the reach of low
and middle-income groups across the four metros.

The rise in land prices over the last few years is a well-known fact. However, the escalating cost of cement has not gripped the public
imagination in the same way, despite the substantial and rapid hike in prices over the last 24 months.

Consider this: retail prices of cement, a key building material, have gone up by 9 to 42 per cent across the four metros. Chennai has seen the
steepest rise with the average price going up by 42 per cent from Rs.180 per bag of 50 kg in April 2006 to Rs.255 per bag in February 2008.

The story is similar in the other cities: the average price in Mumbai was Rs.268 per bag in February 2008, up from Rs.245 a bag in April
2006. In New Delhi, it has gone up from Rs.205 a bag in April 2006 to Rs.235 a bag in February 2008, and from Rs.192 to Rs.217 a bag in
Kolkata.

Interestingly, the steepest increase came in the last year. A bag of cement which cost less than Rs. 200 till January 2007, went up to Rs. 245
in August 2007. It stayed at that level till December 2007, before gaining another Rs. 10 in the first two months of 2008 to rule at Rs. 255 a
bag in February. [Cement Manufacturers Association figures].

Until April 2007, cement was cheaper in Chennai compared to the other metros. In April 2007, the average price per bag in Chennai was
Rs.220, against Rs.230 in Delhi, Rs.222 in Kolkata and Rs.258 in Mumbai. But from July 2008, cement has become costlier in Chennai than
in Dehi and Kolkata. Cement prices have always been higher in Mumbai, but the escalation has been proportionately less: Rs.268 a bag in
February 2008, up from Rs.245 a bag in April 2006.

A simple explanation for this phenomenon is the demand-supply mismatch. Cement consumption grew by 10 per cent to 149 million tonnes
in 2006-07 and by 9 per cent to 162 million tonnes in 2007-08, without a corresponding increase in supply, despite cement plants operating
at or close to full capacity. Rising input costs and inflationary pressures have exacerbated the situation.

In the South, consumption was up by 12 per cent in 2006-07 and 11 per cent in 2007-08. The North saw consumption rise by 10 per cent in
2006-07 and 12 per cent in 2007-08. In the West, it grew by 9 per cent in 2006-07 and 12 per cent in 2007-08. The East and Central regions
reported single digit growth in consumption in the same years.

Some 100 million tonnes of fresh capacity is expected to come on stream over the next three years; but growing demand and the long lead
time for commissioning is expected to keep prices up in the near term, say industry sources.

Though the industry has long been decontrolled, cement has always been a politically sensitive commodity. The previous AIADMK
Government in Tamil Nadu toyed with a dual sales tax on cement by announcing a price threshold limit, before withdrawing the proposal.

Union Finance Minister P. Chidambaram too came out with a twin-duty proposal in his budget for 2007-08, with a lower excise duty of
Rs.350 per tonne for cement priced at Rs.190 per bag of 50 kg, and excise of Rs.600 per tonne if priced at above Rs.190 per bag of 50 kg.
This was against the prevailing flat excise duty of Rs.400 a tonne.

Ironically, this had a negative impact, with cement prices staying well above Rs.200 a bag of 50 kg.Conceding that the measure had failed, the
Finance Minister dumped the specific duty and introduced an ad valorem rate of 12 per cent for cement selling above Rs.190 a bag of 50 kg.

The DMK Government in Tamil Nadu decided to import cement in September 2007 to check cement prices. Later, in January 2008, it even
issued a threat of nationalisation to bring cement makers to the negotiating table. The threat worked: cement makers agreed to supply 20
lakh bags a month at Rs.200 per bag of 50 kg to support the poor and middle class consumers.

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