Even as the cement industry is reeling from CCI’s penalty for cartelisation, Shilpa Shree probes further to know how this has and will impact the sector and industry on the whole.The Competition Council of India (CCI) – following a complaint by build-ers – in a first-of-its-kind order, has penalised cement manufacturers for cartelisation, showing that there may be truth in the decade-old accusation. The CCI, in its order dated June 20, 2012, said that the top 11 companies will have to cough up 50 per cent of their net profit earned between 2009-11, which amounts to a whopping Rs 6,307 crore! Builders’ Association of India (BAI), however, wants CCI to increase the fine to three times their net profit.Payback?Justifying this demand, DL Desai, Trustee, BAI, says, “Only then will it deter them from cartelising in the future. These companies have consistently posted growth in their net profits for the last few years. The cement industry only caters to the construction and infrastructure sectors. Hence, it is surprising that while the construction sector is not growing, the cement sector is.”The story goes back almost a decade when builders began to accuse these manufacturers of cartelisation. But, it took a serious turn when BAI brought the issue to the notice of the CCI in mid 2010. In the complaint, the builders included data on cement factories’ utilisation, which fell from 94 per cent in 2007 to 79 per cent in 2011, along with data from 34 centres across the country on cement pricing. “They were under producing the material and increasing the price,” exclaims Desai.Moreover, two meetings conducted by the Cement Manufacturers Association of India (CMA) in early 2011 irked the builders further, after which, they began to believe that the CMA was a platform for cartel activities and claimed that cement prices had risen post the meetings. The consequent increase in the prices just made matters worse, with the construction and real estate sectors – which had been reeling under pressure due to fall in sales and increase in land prices – constantly trying to keep their costs under check.Cause and effectCement and steel are two of the most important raw materials consumed by the construction and infrastructure industries. Any change in price is bound to affect the construction cost. “The rise in cement prices increased my cost by Rs 60 per sq ft,” laments Paras Gundecha, Chairman and Managing Director, Gundecha Group, and President, Maharashtra Chamber of Housing Industry.Besides the price increase, the bigger concern for the sector is the under production of the material. “Prices are just one part of the problem,” adds Rajesh Vardhan, Managing Director, Vardhman Group. “The bigger problem is timely availability of cement. If produ-ction doesn’t increase, projects get delayed, and this eventually adds to the company’s losses.The big impactCCIs penalty is sure to impact the cement industry in a big way – the biggest being in its pricing power. The penalty to the cement manufacturers to cease and desist from cartelisation will curtail the pricing power of cement makers in the near-to-medium term and will have a significant effect on their profitability. “However, we believe that the impact will differ for players according to the region they are in. For instance, players with a significant presence in the South, which is plagued with demand slowdown and excess capacity, will be most impacted,” reported V Srinivasan, Cement Analyst, Angel Broking, in a research report compiled after the CCI order.The defendant’s wordSoon after the order, the otherwise silent cement sector reacted strongly. “We feel aggrieved by this order and will appeal against it before the Competition Appellate Tribunal,” said a spokesperson from ACC Ltd, which may have to shell out Rs 1,147.59 crore. ACC Ltd and Ambuja Cements Ltd’s (ACL) parent company Holcim in its media statement said, “Each of ACC and ACL contest the allegations and findings against them in the CCI order and will pursue all available legal steps to defend their respective positions.” Similarly, Aditya Birla Group-owned UltraTech Cement that will have to pay a penalty of Rs 1,175 crore has been reported as stating that, “The company will take appropriate action after having fully examined the order,” in a stock exchange filing. Similar statements were made by Chennai-based India Cements who may have to pay a penalty of Rs 187.48 crore.However, an analysis of these companies’ stock situation just two to three days after the CCI order came through shows that they do not seem to have been affected (See table). In fact, instead of any significant dip in numbers, two to three companies have seen a slight rise. Says Srinivasan, “Possibly, market players do not believe that this order will go through.”On a positive noteNevertheless, the CCI seems unfazed. An official from the corporation on condition of anonymity said, “The companies have 60 days to file an appeal with the Competition Appellate Tribunal. Prima facie, however, the case seems to be in favour of the builders,” he added.Finally…?The story doesn’t end here. “The manufacturers’ paying a penalty is just a small solution. The bigger problem is to ensure that there is no cartelisation in the future,” says Vardhan. While the order restrains cement manufacturers from indulging in any kind of cartel activity, it does not clearly specify how to avoid them. He adds, “But, I cannot think of any measures that the government can take to avoid cartelisation; there is a need for a mind-set change amongst manufacturers,”On their part, while the regulator also alleges that big cement manufacturers sent signals to others to increase prices by making announcements in the media about their intention to hike prices, there is no evidence to prove that prices were discussed at their meetings. Also cement companies can easily argue in their appeal that it being a commodity, price increases get mirrored across all companies manufacturing the commodity. Further, since they all belong to reputed business houses, the allegation without documentary evidence is pure conjecture.CMA has argued that for a cartel to exist, there should be a mechanism in place for:• Coordinate the cartel agreement and ensure its functioning.• Monitor the behaviour and conduct of the members of the cartel.• Punishing the members of the cartel who do not fall in line with decision of cartel.While the CCI’s order is a landmark, it is resting on weak legs. Evidence presented is circumstantial and is based mainly on behavioural indicators; there is no clinching evidence. CCI should not rely on ambiguous behavioural indicators alone. While it remains to be seen if the charges get proven, this order will definitely set a new code of behaviour amongst companies getting cosy.