Construction materials: Scandal surfaces, alleging cartelisation in cement sector

Ministry of Industries had asked CCP to take notice of artificially inflated prices, but request was withdrawn.

ISLAMABAD:

The Pakistan Peoples Party-led government apparently swept a scandal involving the cement sector under the carpet, allowing domestic cement manufacturers to pocket billions of rupees from consumers through abnormal increases in cement prices during 2011 and 2012.

According to documents available with The Express Tribune, the Ministry of Industries had written to the Competition Commission of Pakistan (CCP) on December 31, 2012, asking the antitrust watchdog to take action against a cartel of cement manufacturers who allegedly made billions of rupees by unfairly raising cement prices in 2011 and 2012.

Sources said the letter had been sent to the CCP by some well-meaning individuals within the ministry without the knowledge of the industries secretary – the top bureaucrat assigned to the ministry – and the top political leadership of the country.

“However, soon after Industries Secretary Shafqat Naghmi and the top political leadership came to know about the letter, they swung into action and withdrew it, and the CCP was asked not to take any action,” sources said.

When contacted for comments, Industries Secretary Shafqat Naghmi did not reply even after repeated attempts. Cement manufacturers have also refused to respond to queries.

The retail price, calculated by the Ministry of Industries on the basis of audited financial accounts for 2011-12, comes to Rs319 per bag for 2011, and Rs328 per bag for 2012; whereas actual retail price remained at Rs400 per bag in 2011, and Rs 450 per bag in 2012 on average. The average after-tax profit earned per share and return on equity for the industry increased by 200% and 900% respectively from year 2011 to 2012, the letter says.

“It is therefore requested that measures may kindly by taken to ensure [that] the upward cement prices [sic] are reasonable and undue profit is not being charged from the consumers,” the Ministry of Industries had said in the letter sent to the CCP.

Soaring profitability

The Express Tribune had reported on March 7, 2013 that the combined profits of the cement industry for the first six months of fiscal 2012-13 had come within touching distance of the combined profits for the entire preceding year.

Similarly, Pakistan Today had reported on March 2, 2013, that the prime driver in the industry’s growth remained a 17% escalation in the price of the commodity. “Support to profitability also came from [a] 24% decline in coal prices that account for 40% [of the] sector’s production cost. Subsequently, gross margins improved by [a] significant nine percentage points to 36% in 1HFY13, as against 27% in [the] same period last year,” Pakistan Today had reported.

The Express Tribune had also reported on September 26, 2012 that a 26% jump in cement prices had propelled profits of cement companies roughly seven times in fiscal 2012. Out of 10 cement companies which announced their full-year results at that point in time, only one posted losses that year. A year earlier, almost 50% of the companies were in the red.

Earlier agitation

The Association of Builders and Developers of Pakistan (ABAD) and the Constructors Association of Pakistan (CAP) had launched a campaign on April 27, 2012, against alleged illegal profiteering by the cement industry, The Express Tribune had reported. ABAD is the representative body of Pakistan’s builders and developers with over 700 members from all provinces.

During a joint meeting, ABAD Chairman Mohsin Sheikhani had said that abnormal increases in the price of cement amounted to illegal profiteering by the cartel and affected the construction industry negatively.

Addressing a meeting of ABAD members earlier that month on April 15, 2012, Sheikhani had said: “They [cement manufacturers] claim that cement consumption has gone up, creating a gap in its demand and supply. If that is true, why don’t they use the idle capacity of their plants, most of which currently operate at 60%-70% capacity?” he had asked.

ABAD representatives had vowed to approach the CCP to take punitive measures against cement manufacturers, saying that former CCP Chief Khalid Mirza had made significant breakthroughs in checking cartelisation in the cement industry.

The CCP had taken notice of cartelisation in the cement industry in 2002, and had proved it through documentary evidence of an agreement involving the Cement Manufacturers Association. The CCP had imposed a fine of over Rs6 billion at that time.

However, since then, cement manufacturers do not maintain a uniform price of cement, prima facie to avoid action by the CCP. The CCP has therefore failed to prove cartelisation due to a lack of evidence.

Published in The Express Tribune, March 29^th, 2013.

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