Are cement cos fixing prices?

Cement stock prices dived after MRTPC issued notices to 14 cement companies for cartelisation including ACC, India Cements, Ambuja Cement, JK Cement and others.

MRTPC has ordered a probe into the business practices of the cement manufacturers. There are allegations that they have acted in a cartel and colluded to hike prices.

Anil Singhvi, Partner at Notz Stucki maintains that there is no substance for the MRTPC notice against cartelisation. He said, "The period they are taking is 2005-2006, for which the DGI has filed the report. There is a preliminary investigation filed by two builders. I saw the complete complaint and there was no truth in the complaint and there was no substance as well."

He doesn't even think there was any substance in this for even DGI even to have sent this report to MRTPC.

While, RG Bagla, Group Executive President at JK Cements has completely denied the possibility of cartelisation due to competitive pressures. He has denied receiving any notice from MRTPC so far either. 

"When there are 20 competitors operating in a market, how there can be a cartel. There is demand and adequate supply, so there is no question of any cartel or any consulted effort by anybody," is his retort.

For all practical purposes, cartelisation is the most difficult thing in the work to prove, but the question certainly begs asking and the cement companies will have to answer. But more than that, this move has dampened sentiments, which is seen in the stock prices movement.

Deven Choksey of KR Choksey Securities expects cement stocks to suffer a knee-jerk reaction because of the inquiry. His explanation is, "Unfortunately nobody realises that there is a demand-supply gap existing. Because of higher demand, obviously the commodity has a tendency to move up and cement is no exception, given the construction boom in the country."

Suresh Soni, CIO at Deutsche Asset Management has some exposure in cement. They are not overweight on the stocks, but they have a market wide exposure in cement and the stocks have always reacted negatively to the news.

He said, "But I would believe it will be a long-term bet and it will take MRTPC long to establish that there is a case against the cement companies. I would also assume that there is decent fighting chance for cement companies, because the price rise has largely happened particularly when the capacity utilisation was going up. The capacity utilisation in the sector has been 94-95% and the price rise is rather normal in that sense. So one should probably look at dips as a buying opportunity rather than selling."

The Government said the case will come up for hearing on October 25. Government has prima facie proof of cartelisation in the cement industry.