The Indian Concrete League

The Cement Manufacturers Association of India aka the Indian Concrete League wields enormous power in our real estate economy aka infra sector.  The members of this organization comprising of top cement manufacturing companies for all practical reasons, virtually controls the entire infrastructure sector of our country by controlling production and pricing of cement.  A few of its members, sitting at a table inside their posh, well-lit office can stall any large development project whether public or private, increase manifolds the cost of construction of bridges, dams, residential and commercial complex and other projects of national importance throughout the country with a few strokes of pen.  They almost have powers to bring to a screeching halt the infra-structure engine of our nation.  The recent order of the Competition Commission levying a penalty on these companies for cartelization is a wake-up call.  The author wonders what happens to National Interest when a few people wield such enormous powers on a key input material like cement which virtually has no known substitute.  What happens when such parallel pricing and parallel production arrangements of the cartels sends waves of inflation into our economy which affects a nation of 1.2 billion people.

The Indian Concrete League

By now it is an open secret that Cement companies in India today work like ‘one body and one mind’.  As per documents obtained from Competition Commission, it is clear that the companies fix prices in advance with impunity, decide each other’s production capacities with meticulous ease.  They even monitor production and distribution of cement in each other’s plant by deploying personnel there.  And they even bifurcate sales territories amongst themselves to ensure maximum profitability is achieved and any form of competition is eliminated at bud. 

While the Cement manufacturing companies vociferously claim that they are fiercely competitive with one another, the competition commission in recent order finds the opposite to be true.  The Commission notes “The act and conduct of the cement companies establish that they are a cartel. the Commission holds that the cement companies acting as a cartel have limited, controlled and also attempted to control the production and price of cement in the market in lndia (para 178 of CCI order)”

Understanding Oligopolistic nature of Cement Industry:

Why Cartelization of Cement Industry happens is not a rocket science.  The inherent nature of cement industry is to blame for this.  To start with cement has virtually no known substitute so threat of substitute is low and the bargaining power of customers is weak making its demand relatively inelastic.  The inter-firm rivalry is weak as there are only a few players.  And the entry barrier is high due to cement industry being a capital intensive industry.  The bargaining power of supplier is also moderate as inputs like coal are plentifully available locally from India and Indonesia. 

While India has the capacity to become the world's third largest construction market by 2025 and a US$ 1 trillion market, according to a study by Global Construction Perspectives and Oxford Economics, the Cement Industry is still characterised by an oligopolistic setup.  Even as India's cement industry has become the second largest producer and exporter in the world, the problem of cartelization looms large in myriad ways. 

Consider for example that twelve cement companies have about 75-80% of the total production capacity in India with about 21 companies controlling about 90-95% market share in terms of capacity.  What is more interesting is that these companies have varying levels of shareholdings in each other making inter-firm rivalry a theory rather than practice.

Given the oligopolistic nature of the market, each company takes into account the likely reactions of other companies while making decisions particularly regarding prices.  In such a scenario, collusion between companies is possible and can be easily made out from circumstantial evidence.

The Tell Tale Signature of a Cartel

A Cartel can never be detected from direct evidence but can easily be found out from overwhelming circumstantial evidence.  Given below are the tell-tale signature of a cartel

Price Parallelism:

The Economic analysis of price data indicated that there was a very strong positive correlation in the prices of all companies.  Simply put the cement companies were increasing prices simultaneously in a scripted fashion.

Limiting and controlling production:
The documents obtained from the Commission shows that while the capacity utilisation increased, the production has not increased commensurately during this period and plant wise capacity utilisation across the board had decreased.  Simply put the cement companies were controlling production in spite of having an increased production capacity.

Limiting and controlling supply:
The Commission found that the cement companies indulged in controlling and limiting the supply of cement in the market in an organized fashion.

Production Parallelism:
According to the commission, the cement companies reduced production collectively, although during the same period the production of the cement companies differed.  This was the clearest indication of co-ordinated and organized behaviour.

Dispatch Parallelism:
The Commission also observed that the dispatches made by the cement companies have been identical. Such identical despatch can only be a result of co-ordination and collusion.

Increase in price:
The Cement companies created a deliberate shortage in production and supplies.  Since the nature of Cement demand is relatively inelastic in nature this resulted automatically in higher prices for cement.
The Commission noted that it would be impossible to justify the lower capacity utilisation especially in a market which has high demand.  Therefore the behaviour was a co-ordinated attempt at raising prices by cutting production.

Price Leadership:
The commission noted that due to oligopolistic nature of the market and a few major cement manufacturers, the price leaders discussed with the other manufactures to co-ordinate their strategies to increase prices.

Commission levies a Penalty of Rs 6300 croresThe Competition Commission of India (CCI) had cracked the whip on these companies and imposed a whopping penalty of Rs 6,307 crores on 11 leading cement firms for forming a cartel and for the act of collusion to charge higher prices to consumers.  The Competition commission after investigating a complaint from Builders Association of India in no uncertain terms had noted that the companies were engaged in a collusive behaviour with parallel pricing and parallel cutting of production to raise prices.

Role of Cement Manufacturers Association (‘CMA’)

Further the commission also notes that the Cement Manufacturers Association, an association which was purportedly setup to promote the interests of cement industry as a whole facilitates these activities by providing the much needed production and sales data’s to each other.  The Commission noted that the CMA publishes statistics on production and dispatch of each company (factory wise) and circulates such information amongst its members. The sharing of price, production and dispatch data makes co-ordination easier amongst the cement companies.  This ensures that such unscrupulous activities (like price fixation) take place in a more informed manner. 

The Commission also noted that cement prices increased sharply after the High Powered Committee Meetings of the CMA which were attended by the cement companies.  What transpired in these meetings is not a difficult guess.

To sum up what comes out of the courts document is that CMA acts like a ‘Big Boys Club’ and helps to ensure that anti-competitive activities take place in a more organized, informed and meticulous manner.

Cartelization affects National Interest and Infra Sector Growth

The Author argues that the effects of Cartelization of Cement Industry seriously impacts national interest and also negatively impacts the infra sector growth.  For example, the Cement Manufacturers Association of India aka the Indian Concrete League wields enormous power in our real estate economy.  This organization comprising of cement manufacturing companies for all practical reasons, virtually controls the entire infrastructure sector of our country.  A few of its members by few strokes of pen (by cutting production of cement and increasing prices), sitting at a table inside their posh, well-lit office can stall any large development project whether public or private, increase manifolds the cost of bridges, dams, residential and commercial complex throughout the country.  They have powers to bring to a screeching halt the infra-structure engine of our nation by parallel pricing, parallel cutting down of production or even choking supplies.

What happens when such parallel pricing and parallel production arrangements of the cartel send waves of inflation into our economy which affects a nation of 1.2 billion people is also a well-known phenomenon.  What happens to National Interest when a few people wield such enormous and absolute powers on a key input material like cement which virtually has no known substitute is left to the imagination of the readers? 

What is at stake in this whole issue is also economic development of this nation.  Cartels like these seriously impact economic development.  The Commission correctly noted that national interest affected in its order “The act of the parties in limiting and controlling supplies in the market and determining prices through an anti-competitive agreement is not only detrimental to the cause of the consumers but also to the whole economy since cement is a crucial input in construction and infrastructure industry vital for economic development of the country (para 180)”

Containing the Djinns of Concrete

So how does one contain these Djinns of Concrete? How does one ensure that the interest of all stake holders are well managed?  Firstly the author believes that the the Ayn-Randian view of free market economics is flawed in this context especially in an oligopolistic setup and when one talks of key input industries like Cement.  In context of cement industry of India, the Ayn-Randian view of free market economics simply ignores the fact that a few men sitting at a table at their whims and fancies can, for all practical reasons, halt key projects of national importance and send waves of inflation into a nation of more than a billion people.  Therefore more regulations and active monitoring by the state is a necessity for healthy growth of the Industry.  The fact of the matter is that liberalisation has done away with many of the instruments that the government has at its command to deal with cartels of the kind that we see in cement industry today.  Economic Reforms without regulations not only engenders creation of monopolies and oligopolies but also provides incentives to oligopolistic firms to exercise their market power in a manner that promotes only their own interest.

Secondly, a multi-faceted approach is necessary to contain these Djinns of Concrete.  We must not only strengthen our deterrent regulations to impose higher penalties for such unscrupulous acts of price fixing but also actively work to reduce incentives which motivate companies to adopt such practices and increase real competition.  In short we must make capitalism work and work for all.

Concluding thoughts - Making capitalism work

A hundred years of empirical evidence in economic history of the world indicates that capitalism does works for all but only when it is made to work for benefit of all.  In other words Adam Smith’s invisible hand can do wonders and bring economic prosperity as long as it is safe guarded from those who seek to fracture the hand to gain undue benefits for themselves.

Therefore while Competition Commission has done a laudable job of imposing penalties for cartelization, the Author hastens to point out that the work doesn’t end there.  The Government of India has a greater responsibility.   It has to ensure that the interests of entrepreneurs, the general public and the state is adequately balanced and well protected.  It has to ensure that ‘Cement’ a key input which has absolutely no substitute today is always available as at reasonable prices to all those who need it.  The way to do it is not by going back to the Licence Raj or by fixing prices of cement by an executive fiat. 

The way to do it is by making capitalism work.  The way to do that is by increasing competition in the sector which will unleash competitive spirit leading to innovation and growth of the industry as a whole. 

1. The author recommends providing economic and fiscal incentives and special stimulus to new entrepreneurs to start new cement factories and increase production capacities.

2. The author also recommends setting up a fully Independent Cement Regulator which is both functionally and financially autonomous of the state and is comprised of experts from the Industry who will balance the interests of all stake holders concerned and regulate the industry for benefit of all.

3. The Author recommends that the state must help to bring down the entry barrier by providing new cement companies with low duty import of capital goods and providing easy finance to increase their production capacities to compete with bigger and global players. 

4. Finally the Author also recommends that the state must also start more of its own fully autonomous cement factories and compete shoulder to shoulder with private entrepreneurs in equal measure.  It is the withdrawal of the state in the wake of deregulation that helped those oligopolies to be created and nurtured.  A free market does not automatically mean that the state is reduced to a role of a tax eating rentier class but can also contribute in equal steps and in equal measure to the growth engine of the nation while simultaneously managing public interest.