An Overview of the Cement Industry

Cement is vital industry for any country’s growth. In India, this sector was under government
control but since the initiation of reforms it has been freed to a large extent. However, even
now government interference is evident in the pricing of the commodity under the pretext of
the existence of a producer’s cartel. India even though 2nd largest producer of cement has per
capita consumption of cement, at 125 kg, is among the lowest in the world. Most of the rural
poor, who live in mud huts, and even a significant number of the urban poor (who make do
with pavements or tin-roofed hovels), are unable to afford the commodity. Even though the
demand and supply of the commodity has grown in the past few years cement as a
commodity still has large scope for expansion, especially in a rapidly developing economy
like India.

Features of an Oligopoly market and its application to the Cement Industry

1. Only a few firms supply the entire market with a product that may be standardized
or differentiated.

Cement Industry
There are 127 firms present in the cement sector across the country, distributed into five
geographic zones. The southern Zone has the maximum share in the All-India production
of cement, followed by the Northern Zone. Firms are spread across various states in the
country.

2. At least some firms have large market shares and thus can influence the price of the
product.
Cement Industry
The industry has seen a process of growing consolidation of capacity in a few hands as a
result of a spate of mega-mergers and acquisitions. Leading the movement has been
international cement major Lafarge of France that has acquired the cement businesses of
Raymond and Tata Steel and is reportedly gearing to acquire Jayaprakash Cement. But
there have been others in the game as well. Gujarat Ambuja has bought out the Tata stake
in ACC for Rs.925 crores, India Cements has acquired Raasi Cement and Italcementi has
 taken a 50 per cent stake in Zuari Cement. All this is occurring in an industry where
already capacity with the top six players accounts for more than 60 per cent of total
production.Such a high concentration index is a factor that strongly indicates an
oligopolistic market structure

3. There is an indeterminateness of the demand curve facing oligopolist firms

Cement Industry
Demand or consumption of cement has been analyzed across the five respective regions.
Results for the central and northern zones are summarized in Figure. From the graph, it is
evident that March 06 and Sep 06 witnessed sudden surge in demand after the previous
months have faced demand shocks. Another apparent feature is that demand for cement is
highly volatile across all zones. Shocks in demand are followed by sudden surges. Such
high demand variability is a characteristic of oligopoly markets
4. Firms in an Oligopoly market exhibit increasing sales but decreasing expense to sales
ratio.
Cement Industry
The expense (or cost to sales) ratio per annum of the cement companies has decreased
over the years as indicated in the figure. Though the total sales have picked up, the cost of
producing cement has not increased at the same pace. The sharp increase in sales without a
corresponding increase in cost does indicate possibility of cartel behaviour which is a
characteristic of oligopoly markets.

5. The oligopoly market is concerned with group behaviour

Cement Industry
The cement industry has seen a process of growing consolidation of capacity in a few
hands as a result of mega-mergers and acquisitions. But what is disturbing is that the
process of consolidation has been accompanied by growing evidence of monopolistic
practices. Demand for cement picked up in 1999-2000, as reflected in the 20 per cent
increase in output during the first eight months of that financial year. Using the occasion,
as well as the base for collusive practices that capacity concentration affords, producers
had consciously jacked up prices. Prices which were slack till about November had been
escalating rapidly since, as leading producers repeatedly hiked prices supported by
 measures aimed to reduce supply and create an artificial shortage. Thus, in November
these producers had decided to shut down capacity for 35 days, instead of the usual 25
days for maintenance purposes. Restrictions on distribution have also reportedly been
adopted by what is clearly a cartel. With the support of such measures, prices were hiked
by 36 per cent in five successive revisions during the last two months of 2000, taking the
price in Mumbai from Rs.140 a bag to Rs.190 a bag. Other markets such as those in
Andhra Pradesh, Tamil Nadu and Kerala have witnessed similar increases.

6. The firms in an oligopolistic industry are aware of their interdependence and always
consider their rivals reactions when selecting prices and other business policies.
Cement Industry
Retail prices of cement per 50 kg bag across the five zones identified by CMIE en collated
and compared spanning a time period of two years from Sep 2005 to Sep2007. In March
2006, a price surge of 16.95 per cent in the northern zone, 10.5 per cent in the eastern
zone, 15.43 per cent in the western zone and 10.95 in central zone is observed. The central
region had two consecutive increments of more than 10 per cent. Southern zone witnessed
a per cent change of 16.97 per cent in the month of May-2006. The interesting observation
is that this sudden surge in price has been observed simultaneously across four zones
during March 2006 which is evidence of the interdependence of firms when selecting
prices.