It all started when the BAI (Builders Association of India) lodged a complaint with CCI in July 2010, alleging restrictive trade practices & collusive price fixing in the Indian cement industry. The BAI’s charges were mainly against CMA & 10 major cement manufacturers.
BAI in its complaint alleged that despite having large capacities, these companies formed a cartel & used the platform of CMA to synchronise the reduction of utilisation levels, thereby limiting supplies to the market, and hiking the prices in tandem.
While all the cement companies have their manufacturing units located in various parts of the country with different input & transportation costs, the cement companies decided to hike prices of the commodity uniformly and simultaneously, BAI alleged.
BAI also said that though the companies expanded their installed capacities, the utilisation did not reflect a relative rise.
“The informant (BAI) has averred that in the normal course, in an unregulated market, if the demand is constant and the production of the goods increases, the price of the products should reduce particularly when cost of production also reduces,” the CCI order noted.
Following complaints from BAI, the CCI directed its director general (DG) of investigation in September 2010 to probe the matter and submit a report.
According to a CCI official, the investigations were carried out based on various inquiries, analyses of communications between the cement companies & dealers, and data from various sources. In the absence of no direct evidence, the DG also analysed circumstantial evidence, including behavioural indicators to find out whether there was any agreement & concerted action by manufacturers to raise prices in tandem.
The DG, in its report submitted on 31 May 2011, concluded that, yes, cement companies in fact entered into anti competitive agreements in order to control the supply of cement. It also said the companies used the platform of CMA and indulged in collusive price fixing.
From its analysis of the price data for cement, the DG observed that the price of cement in the country rose faster than its input cost, as there had been a continuous positive growth in the cement prices over the past 5 to 6 years. There has also been a continuous divergence between the cement price index & the index price of various inputs like coal, electricity and crude petroleum, and the gap has widened since 2000-01, it said.
The DG’s report highlighted a curious fact - that the price of cement rose from Rs. 150 per bag (50 Kg) in 2004-05 to Rs. 300 a bag by March 2011 despite the fact that the cost of sales has increased by merely 30%.
Also, the production capacity of these companies ramped up considerably — increasing from 157 mmt in 2005-06 to 287 mmt by the end of March 2011. However, the capacity utilisation has been on a continuous downward trend from 2008-09, coming down to 73 per cent by 2010-11.
What’s more, the investigator gathered that the cost of production does not play an important role in determining cement prices, except when there are substantial changes in taxes. “The DG has found in course of investigation that the change in price is mainly effected by external factors and not by internal ones like cost, production, etc.” the CCI order said.
From an analysis of the cost audit reports of these cement companies, the DG observed that the cement industry was able to put up a consistently good performance, realising 26% operating margins - versus 16% for the rest of the industry during the past 3 to 4 years.
Cement Cartel Worked..?
According to Builders Association of India's (BAI’s) submissions to the CCI, major cement producers along with CMA divided the whole market into 5 zones, which enabled them to control the supply & fix prices by forming a cartel.
According to DG’s investigation report, CMA formed a high power committee & the prices of cement were discussed in its meetings. Even companies like ACC & Ambuja Cements, which had resigned from CMA, continued to participate in such meetings. The CMA apparently nominated different companies in 34 different centres to collect and disseminate the retail as well as the wholesale price. This information is either collected on phone or through e-mails.
Though CMA argued that it did so for the Department of Industrial Policy and Promotion, the DG maintains the common platform of CMA was used for entering into anti-competitive agreements by companies.
The Order..!
Based on the finding of the DG’s probe and after listening to companies, the competition watchdog imposed a heavy penalty of Rs 6,307.32 crore on the 10-top cement companies, including ACC, Ambuja Cements, Ultratech and Jaypee Cements as well as CMA, accusing them of creating a cartel.
The CCI has found these cement manufacturers in violation of the provisions of the Competition Act, 2002 which deals with anti competitive agreements, including cartels.
Grasim Cements (now merged with Ultratech Cements), Lafarge India, JK Cement, India Cements, Madras Cements, Century Cements & Binani Cements are among others found guilty and penalised.
“…The Commission finds that opposite parties have institutionalised the system of sharing the prices, capacities and production among each other, using the platform of CMA to limit production and supplies and determine the prices of cement in the market,” the CCI order said.
The CCI ruled that each of the 10 firms will have to pay a fine of 0.5% of their profit during 2009-10 and 2010-11 within 90 days. The penalty will go to a government consolidated fund.
In its order, CCI has also directed companies to ‘cease and desist’ from indulging in any activity relating to agreement, understanding or arrangement on prices, production and supply of cement in the market.
Src: BS
BAI in its complaint alleged that despite having large capacities, these companies formed a cartel & used the platform of CMA to synchronise the reduction of utilisation levels, thereby limiting supplies to the market, and hiking the prices in tandem.
While all the cement companies have their manufacturing units located in various parts of the country with different input & transportation costs, the cement companies decided to hike prices of the commodity uniformly and simultaneously, BAI alleged.
BAI also said that though the companies expanded their installed capacities, the utilisation did not reflect a relative rise.
“The informant (BAI) has averred that in the normal course, in an unregulated market, if the demand is constant and the production of the goods increases, the price of the products should reduce particularly when cost of production also reduces,” the CCI order noted.
Following complaints from BAI, the CCI directed its director general (DG) of investigation in September 2010 to probe the matter and submit a report.
According to a CCI official, the investigations were carried out based on various inquiries, analyses of communications between the cement companies & dealers, and data from various sources. In the absence of no direct evidence, the DG also analysed circumstantial evidence, including behavioural indicators to find out whether there was any agreement & concerted action by manufacturers to raise prices in tandem.
The DG, in its report submitted on 31 May 2011, concluded that, yes, cement companies in fact entered into anti competitive agreements in order to control the supply of cement. It also said the companies used the platform of CMA and indulged in collusive price fixing.
From its analysis of the price data for cement, the DG observed that the price of cement in the country rose faster than its input cost, as there had been a continuous positive growth in the cement prices over the past 5 to 6 years. There has also been a continuous divergence between the cement price index & the index price of various inputs like coal, electricity and crude petroleum, and the gap has widened since 2000-01, it said.
The DG’s report highlighted a curious fact - that the price of cement rose from Rs. 150 per bag (50 Kg) in 2004-05 to Rs. 300 a bag by March 2011 despite the fact that the cost of sales has increased by merely 30%.
Also, the production capacity of these companies ramped up considerably — increasing from 157 mmt in 2005-06 to 287 mmt by the end of March 2011. However, the capacity utilisation has been on a continuous downward trend from 2008-09, coming down to 73 per cent by 2010-11.
What’s more, the investigator gathered that the cost of production does not play an important role in determining cement prices, except when there are substantial changes in taxes. “The DG has found in course of investigation that the change in price is mainly effected by external factors and not by internal ones like cost, production, etc.” the CCI order said.
From an analysis of the cost audit reports of these cement companies, the DG observed that the cement industry was able to put up a consistently good performance, realising 26% operating margins - versus 16% for the rest of the industry during the past 3 to 4 years.
Cement Cartel Worked..?
According to Builders Association of India's (BAI’s) submissions to the CCI, major cement producers along with CMA divided the whole market into 5 zones, which enabled them to control the supply & fix prices by forming a cartel.
According to DG’s investigation report, CMA formed a high power committee & the prices of cement were discussed in its meetings. Even companies like ACC & Ambuja Cements, which had resigned from CMA, continued to participate in such meetings. The CMA apparently nominated different companies in 34 different centres to collect and disseminate the retail as well as the wholesale price. This information is either collected on phone or through e-mails.
Though CMA argued that it did so for the Department of Industrial Policy and Promotion, the DG maintains the common platform of CMA was used for entering into anti-competitive agreements by companies.
The Order..!
Based on the finding of the DG’s probe and after listening to companies, the competition watchdog imposed a heavy penalty of Rs 6,307.32 crore on the 10-top cement companies, including ACC, Ambuja Cements, Ultratech and Jaypee Cements as well as CMA, accusing them of creating a cartel.
The CCI has found these cement manufacturers in violation of the provisions of the Competition Act, 2002 which deals with anti competitive agreements, including cartels.
Grasim Cements (now merged with Ultratech Cements), Lafarge India, JK Cement, India Cements, Madras Cements, Century Cements & Binani Cements are among others found guilty and penalised.
“…The Commission finds that opposite parties have institutionalised the system of sharing the prices, capacities and production among each other, using the platform of CMA to limit production and supplies and determine the prices of cement in the market,” the CCI order said.
The CCI ruled that each of the 10 firms will have to pay a fine of 0.5% of their profit during 2009-10 and 2010-11 within 90 days. The penalty will go to a government consolidated fund.
In its order, CCI has also directed companies to ‘cease and desist’ from indulging in any activity relating to agreement, understanding or arrangement on prices, production and supply of cement in the market.
Src: BS
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