There’s something pleasantly rational about the second-biggest cement manufacturer in the world, Lafarge, acquiring a company in the world?s second-biggest cement producer, India. The French company?s acquisition of Larsen & Toubro?s ready-mix concrete business?the deal is worth Rs 1,500 crore?adds to its India portfolio. It has three cement plants in India, two in Chhattisgarh and a grinding unit in Jharkhand. Lafarge?s deal is also part of a larger trend of increasing foreign investment activity in the cement business. Infrastructure and housing will remain big buyers of cement for years to come and consolidation and capacity addition are basic corporate strategies in such contexts. Apart from Lafarge, Holcim, Italcementi and Heidelberg Cements are now big players in the domestic market. Foreign producers account for more than a quarter of the total industry capacity. FDI in the cement sector from April 2000 to February 2008 stands at an impressive $9.44 billion. Little wonder the industry has seen an addition of 21 million tons of production in a single year. Profit after tax margins has increased by 72% in the same period.
Price and cost factors are also favourable. Retail prices of cement (per 50 kg bag) across the five zones in the country have appreciated in the range of 13% to 18% in the last one year. The expense (or, cost-to-sales) ratio has decreased over the years, from 85% in 2005 to 60% in 2007. So, total sales has picked up, but the cost of producing cement has not increased at the same pace, providing excellent business opportunities. Therefore, average capacity utilisation has gone up from 84% to 93% in the last four years. So, is there a cartel? The industry structure is such that it will be very difficult for any group of companies to persist with a cartel. There are already 127 firms producing cement. They are distributed among five geographic zones. And as the Lafarge deal and figures on FDI show, the sector is now too attractive to keep out competition. Even if a northern or southern group of companies intends to fix prices, they will likely be outcompeted soon. So, cement manufacturers cutting prices should not be taken as proof that the sector needs government exhortation. What it needs and what it is getting and will get more in the future is competition.