KARACHI, Jan 31: Cement prices have dropped by 18 per cent or Rs40 per bag in three months, thanks to the break-up of ‘cement cartel’ — a loose association of the country’s two dozen cement producers that determined production ‘quota’ for each. Price of cement per bag has plunged from Rs225 in October (the time until the cartel was intact) to Rs185 per bag currently.

Although bulk of the cement from manufacturers is lifted by stockists and ‘thekedars’, they seem to be passing on the benefit of price reduction to end-users, because that enables them to increase their turnover as well as to keep a comfortable cash flow.

But what clearly is the consumers’ gain, is also the industry’s loss. The cement companies were able to swing back to a net profit of Rs88 million during last financial year, from a staggering loss of Rs2 billion in 2001, mainly due to largescale conversion from furnace oil to coal firing system of production. The shift to coal enabled manufacturers to reduce cost of fuel by 60-65 per cent.

Cement sector analysts say that demand has grown at a robust pace of 10-12 per cent during first half of 2003, part of the reason being lower prices which have pushed stockists to build inventory in anticipation of an eventual revival of the ‘cartel’. But a head of a leading company contends that the capacity utilization in 2002 was 56.8 per cent and that’s the way it is this year as well.

There are 24 cement plants in the country with total production capacity of 17.85 million tons per annum, much of which is in excess of demand. Four more units: Chakwal, Zaman, Saadi and Galadari that are in various stages of commissioning, would add another 4.1 million tons to the capacity.

An industry leader says that under-utilization of capacity by 42 per cent has resulted in substantial losses to the industry. And the excess supply has been the main reason why cement companies began undercutting each other. He observes that the idea of forming a ‘cartel’ first occurred after the cement industry suffered heavy losses in 1997. The understanding was to fix monthly quota of production for each company at 50-68 per cent of their capacity. “The cartel was formed to ensure a stable output price by matching supply with demand,” says an analyst.

But with the quicker conversion to coal, some producers got advantage over others, that was why producers began exceeding their cartel-approved levels, resulting in drop in prices.

An industry insider contends that the ongoing price war is really a fight between Cherat Cement — which is the primary exporter to Afghanistan due to transportation cost advantage — and Lucky Cement — which was the earliest to convert all of the production to coal in August last year.

“The break-up of cartel is causing the cement industry a loss of Rs20 million per day,” says a cement producer. The units in the northern zone, contend that the prices have dropped by Rs750 per ton in two months — November and December — putting an aggregate loss of Rs993 million on their balance sheets.

Some of the market watchers believe that since most companies are at the losing end of the current price war — third since 1997 — cement companies may be forced to huddle around a negotiating table in about the next two weeks. But others are less optimistic about an imminent resolution of disputes such as claims by pre-1996 units to fix their capacity on the basis of maximum dispatches made by them during three base years as was done in 1997 and the argument by some others on how quota ought to be fixed on companies that use either scraped or multiple kilns. Some producers are also said to be insisting that exports to Afghanistan, which currently is outside the quota regime should also be brought in.