The price of control

The price of control

Back in 1942, during the second world war, when India´s cement capacity came under price control, the private market shrank to one tenth of its size. Even after the war was over the government continued to regulate the prices directly from 1945 to 1956. As it became obvious that regulated prices from central government could not provide the cement that the country was demanding, the control was withdrawn in steps. And so the industry stepped into a free market from 1989 onwards. A market where price would be controlled by laws of supply and demand. The de-regulation led to massive expansion of cement capacity as the country opened-up its economy to embrace development.

Today the cement industry, yet again, stands at the same tipping point, and this, when the economy is poised to takeoff. Global brokerage houses like CLSA and Goldman Sachs have turned bullish on the cement sector that has undergone seven years of contraction in the utilisation rate. And though the stock market is full of optimism of the sector´s performance, the cement industry has to deal with yet another price control. This one imposed by representatives of builders and developers in the country.

The rise in cost of fuel, power and logistics is compelling manufacturers to push-up cement price by Rs 1 per kg. But even this marginal price hike was strongly detested by the builders´ associations. Surprisingly, the state governments too were hand-in-hand in these protests and played a key role in pushing the cement industry a step back on the pricing front. Would the marginal price hike really make such a big impact on the profit margins of developers that the government too had to get involved in this tug of war?

Considering that roughly 25 kg of cement is required for a square foot of construction, even at the elevated price of Rs 360 per bag, the total cost of cement in a square foot of construction is just Rs 180. The builders sell apartments at anywhere between Rs 2,500 and Rs 20,000 per square foot in general. How much would a hike or fall of Rs 20-25 per square foot matter in a product that is sold at a price 100 to 1000 times more? It seems like, with the price control, the cement industry is about to lose more than what the builder community at large is about to gain.

The housing sector accounts for 65 per cent of cement consumption in India. Infra led growth in the housing sector is poised to increase in the next six to nine months.

Looks like the representatives of these associations have caught the cement industry at a delicate point. Hopefully the government will do away with populism and look at the hard facts. The price control will only make it unviable for the smaller players to survive in the market, while the larger companies survive on the economies of scale and better technologies. These smaller companies will then become acquisition targets of larger firms with the markets becoming monopolised by a few select players. And that will in turn create a non-competitive environment in the cement market, pushing the prices higher.

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