Philippine Christian University

Graduate School of Business and Management

INDIAN CEMENT INDUSTRY: RIDING THE HIGH TIDE

Managerial Economics
Case Analysis

Submitted by:
Jovilynn Agoc
Maureen Felices

Submitted to:
Prof. Neil Bermudez

23 March 2015
 INDIAN CEMENT INDUSTY: RIDING THE HIGH TIDE

I. TIME CONTEXT

Year 2007

During 2003 to 2007, there has been a gradual increased in cement prices ranging
from Rs 150 per bag to Rs 230 per bag in 2007.

Cement consumption is growing at around 10% and production will increase at

around11% for the next three years (2007 – 2009) which could naturally create a
situation of over production. As estimated, cement industry will face over a capacity
of 17.7 million tonnes per annum (mtpa) in 2008 and 37.7 mtpa in 2009.

With the preceding scenarios, continued collusion amongst industry players isforeseen.
Hence, price will persist to increase on year 2007 and onwards.

II. VIEWPOINT

Mr. Kamal Nath, Minister of Commerce and Industry

Mr. Kamal Nath headed the Ministry of Commerce and Industry (MCI) from 23 May
2004 to 22 May 2009.

MCIformulates, implements and monitors the Foreign Trade Policy (FTP) which
provides the basic framework of policy and strategy to be followed for promoting
exports and trade. The Trade Policy is periodically reviewed to incorporate changes
necessary to take care of emerging economic scenarios both in the domestic and
international economy (http://commerce.nic.in/MOC/index.asp).

Department of Industrial Policy and Promotion, under MCI, monitors the industrial
growth and production, in general, and selected industrial sectors, such as cement,
paper and pulp, leather, tire and rubber, light electrical industries, consumer goods,
consumer durables, light machine tools, light industrial machinery, light engineering
industries etc., in particular. Appropriate interventions are made on the basis of
policy inputs generated by monitoring and periodic review of the industrial sector.
The Department studies, assesses and forecasts the need for technological
development in specific industrial sectors. On this basis, it

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 plans for modernization and technological upgradation of the Indian industry so that
it keeps pace with the international developments in
industrial technology on a continuing
basis(http://commerce.nic.in/MOC/index.asp).

III. STATEMENT OF PROBLEM Incessant increase of cement prices

IV. OBJECTIVES
Must: To control the rising cement prices.
Want: To end the established oligopoly in the cement industry which will in turn allow
the real market forces to influence and determine the actual cement prices.

V. AREAS OF CONSIDERATION
Strengths Weaknesses
1. India is the second largest cement 1. Prone to price cartel4
producing country globally1 2. Volatile cement prices5
2. Self-reliant in meeting domestic
demand of cement2
3. Profitable investment3

Opportunities
1. India’s growing economy6 Threats
2. Exports opportunities7 1. Imports from Pakistan affecting markets
3. Government in Northern India10
infrastructuraldevelopments8
4. Projected over production of
cement9

1 India’s cement industry comprises of 130 cement large plants; 365 mini cement plants
with installed capacity of 172 mtpa.

2This is stated in the case. In addition, the report of Department of Policy and Promotion
in annual domestic demand, production and export of cement during 2005-06 and
2006-07 is shown in the table below.
(In million tonnes)
Year Demand Productio Export
of n of of

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 Cement cement cement
2005-06 135.56 141.81 5.98
2006-07 149.34 155.64 5.89
Source: http://dipp.nic.in/English/Performance_Cement_Industry.pdf

3Average industry returns on capital employed (ROCE) has reached more than 26% due
to the recent burst in cement prices.

The cement industry is highly concentrated. Two large groups, Aditya Birla Group and
4

Holcim Group, together control 40% of the total capacity; 25% is controlled by global
majors which includes Lafarge of France, Holder bank of Switzerland and Cemex of
Mexico. The companies enjoy pricing power, which is typically oligopoly.

5During 2003 to 2007, cement prices have gradually increased from around Rs 150 per
bag toRs 230 per bag.
6India’s economic growth is evidenced by its changing demography, growth of nuclear

families, higher disposable income, changing pattern of spending, easily available home
loans, increased urbanization, and growth of semi-metro and metro cities.

7India exports cement and clinker. It can take advantage of the increasing demand of
cement in global market. World cement demand in 2005 is 2283 million tons having an
estimated demand of 2836 million tons in 2010
(http://philippelasserre.net/contenu/Download/Global_Cement_industry.pdf).

8India’s government has increase investment in infrastructure. With this recent trend, it
is expected that a construction opportunity of over Rs 7.6 trillion will be created over the
next five year.

9Cement consumption is growing at around 10% and production will increase at around
11% in the next three years, which could naturally create a situation of over production.
The industry will face over capacity of 17.7 mtpa in 2008 and 37.7 mtpa in 2009 as
estimated. Additionally, new players are likely to join the industry with huge production
capacities.

10 In 2007,130000 tonnes in 2008, 173000 Metric tonnes of cement was exported to

India. This was done to keep the price of cement under check.

VI. ALTERNATIVE COURSES OF ACTION

1. Entice new domestic players by providing short-term tax incentives to the
cement industry.

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Advantages: It will restrain price cartel while
promoting price competition
 based on actual production cost thus Disadvantages:
stabilizing cement prices. Reduction of projected government
It will help boost infrastructures tax revenues in the short term.
development all over the country due
to anticipated decrease of cement It will not address the problem
prices. overnight
It will discourage over
production of cement.
It will create new job
opportunities for the
unemployed.

Money
Advantages:
India government is one of the biggest consumers of the cement in the
country. Most state governments, in order to attract investments in their
respective states, offer fiscal incentives in the form of sales tax
exemptions/deferrals.
I.e., states like Haryana offer a freeze on power tariff for 5 years, while Gujarat offers
exemption from electric duty.

Disadvantages:
The Indian cement industry is one of the highest taxed one. At the price level
of Rs. 200 per bag, total tax burden, as a percentage of ex-factory realization
works out to 45%. The cement industry has been continuously representing to
the Government for more rational tax regime. Indian cement may encounter
difficulties in attracting new investor.

Manpower
Advantages:
Industry will create jobs in coming years

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 Disadvantages:
The possibility of project-base employment

Time
Advantages:
Increase in infrastructure projects: Infrastructure accounts for 35% of cement
consumption in India. And with increase in government focus on infrastructure
spending, such as roads, highways and airports, the cement demand is likely
to grow in future

Disadvantages:
Capacity creation in India is very difficult because there is no land (in some
places) and no limestone deposits at others. Several cement companies
have written down assets. Expansion will be lower than demand growth

Growing competition in cement industry

2. Lessen import duties on cement.

Advantages:
It will discourage the artificial over
pricing of cement products.
It will promote competition between
domestically produced and imported
cement motivating companies to
offer a more competitive price
instantly.
Disadvantages:
If import duties on cement is
lessened, it will have a
significant impact on taxes
Foreign cement products will
compete with the domestically
produced cement
It is not a long-term solution to the
problem.

Money
Advantages:
For growth of the cement industry, the government may reduce excise duty
on cement
Import of cement into India is freely allowed without having to pay basic
customs duty

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 Export incentive in the form of duty drawback should be introduced to
encourage exports

Disadvantages:
Though Cement is the most essential infrastructure input, the tax on cement
is the highest among the items required for building infrastructure. The levies
and taxes on cement in India are far higher compared to those in countries of
the Asia Pacific Region.

Manpower
Advantages:
Hiring of skilled/professional individual due to the foreign investor

Disadvantages:
Minimize the number of employed work force due to the demand of foreign
investor
High tax payments for individual working in this industry

Time
Advantages:
Growing cement industry
Market concentration and dominant firms signal the possibility of potential
anti-competitive behaviour in many India manufacturing industries

Disadvantages:
Since India is freely allowed without having to pay basic customs duty it may
create unfair trade practices
Competition from imports is extremely limited, making a “hit and run” entry
extremely limited
Trade liberalisation, in terms of the reduction of tariff and non-tariff barriers,
has increased the threat of import competition.
3. Regulate back and establish a price control on cement product.

Advantages:
It will restrain over pricing.
It will help boost infrastructures
development all over the country due
to anticipated decrease of cement
prices.
It will also discourage over
Disadvantages:
It will create a pricing scheme
contrary to the dictates of market
forces
It can cause supply shortage It
will discourage prospective
investors/producers

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 production of cement.

Money
Advantages:
India the only uses Maximum Retail Price for distorts supply demand mechanism of
price discovery.
India uses Maximum Retail for promotes collusion, an anti-competitive practice.

India uses Maximum Retail for discourages competition among producers as well.

Disadvantages:
MRP sub-optimises the costs of distribution

Manpower

Disadvantages:
Increased unemployment results from the slowing production. As few
companies invest in cement industry, they hire fewer employees.

Means less available investor, which also reduces infrastructure projects.

Time
Advantages:
Cement is a success of deregulation
Slow signs of revival in demand

Disadvantages:
Global slowdown caused by the financial crisis, domestically the drop in
investment in infrastructure and housing coupled with a high interest-rate
regime and not to mention the inflation

VII. RECOMMENDATION
After considering all the aspects of the case, it is recommended that ACA 1 be
implemented.

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VIII. CONCLUSION
Providing short-term tax incentives to new players of cement industry will restrain price
cartel while promoting price competition based on actual production cost; thus,
stabilizing cement prices. It will also help boost infrastructures development all over the
country due to the anticipated decrease of cement prices. It will also create new job
opportunities. Further, it will discourage over production of cement.

Thus, ACA 1 is considered to be the optimum solution to the major problem since it
does not only address the must objective, but also shields the Industry from its
weaknesses and possible treat.

IX. PLAN OF ACTIONS

Nature of Activities Responsible Duratio
Person n
Propose a legislative measure in granting Tax Head,
incentives to new domestic players. Department of
Industrial Policy 3
and Promotion months
Approved the proposed legislative measure and * It may

submit to Parliament. Once passed, coordinate Minister of take weeks

Commerce and or even
with the Ministry of Finance for the formulation of
months for a
tax incentive scheme. Formulate tax incentive Industry bill to pass
scheme and submit to Ministry of Finance through
Parliament.
Head, However, an
Approved tax incentive scheme Department of urgent bill
Pass the bill on tax incentive proposal to can be
Revenue passed in a
Parliament
Head, matter of
After the bill has been enacted into a law, days
announce the legislated tax incentive through Department of
wide publication Revenue
Designated
Announce the new policy/law to entice Officer, Ministry
prospective players of the cement industry of Finance 2 weeks
through wide publication of daily
Designated publicat
*http://www.peo.gov.au/learning/fact-sheets/making-a-law.html.
Officer, Ministry ion
of Commerce
and Industry

REFERENCES:
http://www.ibef.org/industry/cement-india.aspx
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http://philippelasserre.net/contenu/Download/Global_Cement_industry.pdf

http://dipp.nic.in/English/Performance_Cement_Industry.pdf

http://commerce.nic.in/MOC/index.asp

http://www.peo.gov.au/learning/fact-sheets/making-a-law.html.

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