Explained: Cartels in cement and steel industry

This comes a month after the Competition Commission of India (CCI) conducted searches in the offices of major cement producers to find the evidence of price collusion.

In 2019, country's anti-trust body started examining complaints of cartelization in the cement industry. Following this, in December 2020, it raided top five cement companies, including UltraTech Cement offices and two subsidiaries of LafargeHolcim, world’s largest cement maker.

It conducted the searches simultaneously in multiple offices across the country and seized electronic and physical data, pieces of equipment and material. The agency had also hired private IT experts to decode the data it collected from the seize.

By December 2020, the industry had hiked cement prices by 23 percent, whereas steel prices rose by whooping 45 percent since January 2020. In January 2020, the price of one cement bag (50 kg) was Rs 349, in December 2020, real estate developers were buying the same bag at Rs 430.

On the other hand, during the same period, the price of steel surged from Rs 40,000 to Rs 58,000.

Gadkari had made similar comments then too, saying these two industries keep taking unfair advantage of government's initiatives to help them. He had said, "I decided to make all roads concrete. I wanted to encourage the cement industry. But they are only taking (unfair) advantage of the situation and making cartels. So, I am now allowing bitumen for road construction.”

Earlier in 2012, CCI had imposed a penalty of over Rs 6,000 crore on 11 leading cement firms in a similar case.

A month after the investigation, Gadkari has brought the matter into the limelight once again. Cement and steel factories exploit people by levying higher rates while there is no noticeable hike in either power or labor costs. This is a clear indication of a cartel in both the industries, union minister Nitin Gadkari said on Sunday.

All the players in the industry have their own iron ore mines and do not have to face any hikes in labour or power rates, he added.

Speaking to the Builders Association of India of Western Region, he wondered why the industry is hiking prices when prices of other input factors have been constant. He indicated government has infra projects worth more than Rs 100 crore in the pipeline and their sustenance would be difficult if both the industries keep this up.

To deal with the situation, the government is mulling over setting a regulator for cement and steel industry. Earlier, Gadkari had written to the PM seeking his intervention on price collusion in the two industries.

Cartels crop up in the industry when competitors collude to control the price in agreement with one another. The direct impact of this conspiracy is seen on the buyers. When all the manufacturers increase the cost simultaneously, customers have no choice but to buy the product. Cartels further discourage new entrants in the market, acting as a barrier. Moreover, the lack of competition due to price-fixing hits innovation directly.

While there is nothing wrong with businesses wanting to earn a profit, they have to give reasons for continuously raising prices, Gadkari had told the Builders’ Association.

Since January 2019, cement prices have gone up every month. Combine this with the pandemic, builders are already facing financial pressures. Now steel companies are acting in concert to increase these prices, Pankaj Bajaj, President, CREDAI-NCR had said late in December.

In mid-December, the Confederation of Real Estate Developers’ Associations of India (CREDAI), wrote to the PM seeking intervention in the price hike of construction raw materials. They regarded the price rise as “unethical and unfair.”

In an interview with CNBC-TV18, Rakesh Arora, managing partner, Go India Advisors said the cement capacity utilisation has declined over the last two years, but the prices were rising.

Capacity utilisation measures the proportion of potential economic output that is actually realised. A company with less than 100 percent utilization can, in theory, increase the production without incurring additional costs.

According to Arora, the industry had room to increase production. However, he said, "cement prices might cool-off if the matter goes to PMO" and given the pressure from Gadkari, it is very much possible. Cement companies may not want to take the government head-on, he added.

On the other hand, cement companies are claiming that rising input costs — notably that of petcoke — are forcing them to raise prices.

In any case, the industry has been on the backfoot since the December raids. There were no price hikes in December, even though the sector traditionally hikes the price mid-January due to spike in construction activities post-festive season. However, this might indicate that the industry does not want to cross the authorities.

Also read: SPEED TAKE: Cement cos unfazed by cartelization charges; but valuations may hurt

The steel industry, on the other hand, has a lesser chance of cartelization, Arora mentioned. “Steel is a global commodity and prices have been going up globally and nobody can control steel prices globally. So there is a less chance of a cartel there,” he said.

Amit Dixit of Edelweiss Institutional Equities further reiterated Arora’s point. He said strong demand and shortage of steel globally is driving the prices higher.

“Not only in India but worldwide we see an unprecedented shortage of steel, and also the iron ore prices globally have gone up. Steel is a global commodity and prices move together in tandem or fall in tandem,” he added.