On Friday, cement companies were knocked down from their pretty perch – they have jumped up 50% in 3-months vis-à-vis the 18% rise in BSE Sensex.
The traders turned jittery when news came in that the Competition Commission of India (CCI) had raided cement companies on price cartelisation allegations. The Builders Association agrees with the CCI as they do not find any reason for cement companies to hike prices when construction activities were subdued due to the pandemic. They are of the opinion that the price hike is a concerted effort on the part of the cement companies to choke cement supply.
If one may recollect, in 2012, the CCI accused 10 cement companies of price cartelisation. At that time, it had imposed a penalty of Rs.63 billion on the cement companies. And then once again in 2016, 11 cement companies were penalized by the CCI to the tune of Rs.67 billion.
The penalty, both times was imposed for using the platform provided by the Cement Manufacturers Association (CMA) to fix cement prices as well as limit and control production and supply of cement in the market, thereby contravening the relevant provisions the Competition Act.
Indicators of price cartelisation as per CCI:
- Oligopolistic mature of the cement market due to concentration levels of cement makers
- Cement companies co-ordinate dispatches – in typical season, Nov and Dec dispatches reduced though construction activity rose – known as ‘dispatch parallelism’
- Low levels of capacity utilization and increasing prices
- CCI really gets into action the moment it see’s higher profit margins and net profits
- Absence of documentary evidence of independent behaviour
The CCI does not concur with the companies argument that price increase happens on account of market forces, higher investment and interest burden.
The CCI’s accusation is almost always based on circumstantial evidence; its like insider trading; you cannot have concrete proof but depend on available data and build the case.
Cartelisation happens not just in cement. Auto ancillary is another sector which constantly faces this accusation too. Strangely enough, this comes at a time when a huge farmers protest is raging across the country as they fear cartelisation to drive demand as well as prices.
Well, in that case, telecom too can be accused of cartelisation or even car, oil marketing, realty and tyre companies. It’s a very thin line – hiking prices for maintaining margins and hiking to adjust their production offtakes.
Some argue that cartelisation does have positive aspects too – in South Korea, the Govt encouraged automobile sector cartelisation to improve the efficiency and the competitiveness of the industry and it actively intervened, in particular during economic downturns. As a result, the Korean automotive industry stabilized and enhanced its competitiveness sufficiently for Korea to become one of the top five automobile-producing countries in the world.
Well, this happening in India is next to impossible. But yes, its good there is a CCI to keep a watch or else with no fear in mind, companies would most certainly have fleeced us with no compunction.