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Leaning on Crisil than markets

S. Vaidya Nathan

CRISIL Advisory Services has just the past week submitted a report on the optimal price situation for the cement industry. The report, compiled at the behest of the Cement Manufacturers' Association, not surprisingly, would surely warm the cockles of th e industry majors.

The Crisil report is likely to come in handy for the industry majors to justify their attempts at ramping up prices. Agreed, in the last five years, costs have run ahead of prices which have, on average, remained largely unchanged. But the kind of rampin g up done in 2000-01 was not in line with the market dynamics. Nor is the Crisil Report.

There appears to be no reason why the demand-supply forces should not be allowed full play at a time when the focus in the economy is on competition and opening up.

Yes, quite a few one-two-million-tonne units have been bleeding, but that was only to be expected given the rapid capacity creation and the concentration in markets of oversupply. Some of the older companies have also been in trouble but that may be more a case of poor management and high financial costs.

Even during the difficult period, between 1996 and 2000, quite a few companies managed decent levels of profitability. There have been periods when prices have run up sharply in Tamil Nadu and Kerala as also Mumbai and then moved the other way. The situa tion in the first two markets has changed sharply due to the capacity addition of close to 5 million tonnes. Despite the rise in capacities, prices have been on an uptrend. Clearly a pointer to tight supply-side management at work (almost bordering on a cartel).

Now Crisil has sought to give its imprimatur to these stage-managed prices across various market by recommending higher prices than what prevail. And for new units, Crisil has recommended a substantial premium. All this is based on cost and a return on c apital employed of 18 per cent which is high by the standards of what India Inc has been accustomed to.

The CMA has also in its annual report for 2000 indicated slightly lower price levels (than Crisil's) by taking forward an ICICI study of 1991. Somehow, the role of Crisil seems to be anachronistic in an area where demand-supply should do the talking.

And if it is the view that the high prices of last year (2000-01) were a consequence of genuine forces of demand and supply, the whole exercise is on wrong footing. Without concerted action -- evidence was available in the production cuts and shutdowns - - the whole thing would not have been possible in the market after market across the country.

The plain truth is that the industry has excess capacity all the time (this is unlikely to change notwithstanding smaller additions). A better balance may emerge only if demand perks up sharply for a few years to narrow the gap between demand and supply.

The Golden Quadrilateral road project may be the industry's big hope. While this is yet to take concrete shape, the process of better demand-supply balance and remunerative prices is best left to the market. From an investment point of view, investors wo uld have to focus on entities that can thrive on volumes and efficiency.

Here the likes of Gujarat Ambuja, Grasim and Madras Cements are relatively better placed. As for cement prices, it may best to go by what has prevailed in the years when the industry was not so well-knit to ramp prices up and this is important because al l such arrangements can collapse once one or two majors decide to choose and chase market share. And, in a market that is consolidating, the bigger players cannot afford to keep taking cuts to keep prices high and sacrifice on market share.