Staff Reporter | 12 May, 2008
A recent study by industry body ASSOCHAM on 'Cost Escalation in Cement Industry has revealed that the cement industry facing the charges of cartelization, has borne a sharp rise of 42 percent in its raw material cost in the fourth quarter of fiscal 2008 even as the wholesale prices of cement surged by 8.5 percent during this period.

As the inflationary pressures across commodity segments have gripped the economy, cement seems to be one of the worst hit sectors as the seven prominent industry players have reported 42 percent jump in the raw material cost against 25 percent increase in sales in the last quarter of fiscal '08, the ASSOCHAM Eco Pulse (AEP) study noted.

The AEP analyzed that the key raw materials used in production of cement have recorded a huge rise in prices. The wholesale prices of limestone, a key ingredient for cement manufacturing, have climbed by 13.9 percent in first three months of the year 2008. Fire clay has risen by as much as 30 percent.

"The power and fuel cost, which constitute 60 per cent of the total operating expenditure of the cement companies have increased by 24 percent in the fourth quarter. This is on account of the 10 rise in coal prices," said ASSOCHAM President, Venugopal N. Dhoot.

Dhoot also highlighted that Owing to high input cost, the top three cement firms including Grasim Industries, Ambuja Cement and ACC, accounting for one-third market share of industry, have registered minimal or no growth in their bottom lines in the last quarter of financial year 2007-08.

Ambuja Cement has reported 42 percent decline despite 18.6 percent growth in top line. Its raw material cost was up by 68 percent.

ACC Ltd with about 11 percent market share has witnessed 7.2 percent growth in sales with no growth in net profit.

Grasim Industries, whose three-fourth revenue comes from cement segment, recorded a rise of 26 percent while sales grew by 18.7 percent. The net profit growth was restricted to nine percent.

Instances of unbearably high raw material costs were found in other cement companies as well. Ultratech Cement recorded 35 percent rise in its raw material cost in Q4 with only 9.3 percent growth in sales. The increase in input cost was 86 percent in case of Binani cement and 51 percent in Dalmia Cement, the study observed.

But at the same time cement remains one of the highest tax items in the country. The differential excise duty structure which was introduced in the Union Budget of fiscal 2007-08, was further revised upwards in the central budget for fiscal 09, wherein excise duty on bulk cement was increased from previous Rs. 400 per tonne to '14 percent or Rs. 400 per tonne whichever is higher.' Also, the excise duty on cement clinkers was raised from Rs. 350 per tonne to Rs. 450 per tonne.

Under the higher duty regime, the cement production growth declined from 9.5 percent in April-February 2006-07 to 7.5 percent in the corresponding period of the financial year 2007-08.

The AEP stated that continued rise in the raw material cost of the cement companies may prove detrimental to their expansion plans in view of their inability to share the cost burden with the consumers. Most of the companies are working at 90-100 percent capacity while many of them plan to raise their capacities in view of the huge demand for cement arising from housing and infrastructure projects.

The Study was done by ASSOCHAM Research Bureau on the basis of the profit and loss statements of the top seven cement companies whose combined market share is more than 45 percent. The wholesale prices of various commodities were based upon the WPI index maintained by the CSO.