It’s all very melodramatic—yesterday’s news plastered across different medias claim the Competition Commission of Pakistan (CCP) had “busted” the cement cartel and found “hardcore evidence” of anti-competitive practices within the industry; evidence constituting of WhatsApp group messages that demonstrably show price fixing and territorial quotas. This is not a surprise.
That the cement industry colludes on capacity, volumes, and/or prices is no secret. It is very evident from data that domestic market shares more or less have remained the same for companies over the years. Once capacity utilization peaks, the industry goes into expansion and new market share is up for grabs as supply substantially exceeds demand. Eventually, through information sharing, the industry is able to sustain a new normal.
It is uncommon for any new players to enter the industry since barriers to entry are high. Mining licenses for new investors are difficult or even impossible to obtain. If that is because of government inefficiencies in vetting the investor and concerns that new manufacturers may not be equipped to safely carry out production of an environmentally hazardous commodity like cement—is a question for the ages. Cement leaders believe it is because cement is a very capital-intensive business.
But given the industry’s sweet margins and the projected demand—specially the one that was to come from CPEC and CPEC-adjacent development and considering the latest move by the government to induce demand in construction, it is anybody’s guess why fresh investors have not entered the business.
Though no single player truly dominates the market, and in turn be the cartel leader, only 2-3 players have higher than 10 percent share in the market with a large number of companies maintaining less than 5 percent share and remaining in their lane. In generally, capacity utilization and market shares have not dramatically changed over the years. The industry association in this case seems to perform the role of arbiter and organizer.
In Sep-20, the CCP raised an inquiry after a price increase across markets in Apr-20 at a time when coal prices were low, demand absent and excise duty reduced. This led to a physical and electronic investigation of several cement companies located in the north zone. (Read more: “Of cartels, competition and consumers”, Apr 27, 2020). Whatever evidence the anti-trust body has unearthed however, the question is: how much would any finding of the CCP yield an actionable intervention here? Intervention that would change the course, or shake the dynamics of the industry. The short answer is: not a lot.
The CCP and before it, the Monopoly Control Authority (MCA) have attempted and failed to find definitive evidence of cartelization and in the cases where evidence was found, take substantive action against such a practice. This is because the CCP does not have supreme autonomy. In general, the CCP has imposed penalties across sectors, but most of which get stuck in courts, never reaching a verdict. The fines on cement companies imposed in 2008 were never paid by them after the rescue from a stay order.
As BMA analyst, Ali Ahmed opines: “The same thing would happen this time. Cement companies simply go to the courts and get a stay order. If it comes to it, the penalty itself imposed by CCP would be negligible which would not have any impact on the financial standing of these companies”.
He is right. The CCP can give a fine of up to Rs75 million or 10 percent of the company turnover to a firm found explicitly entering into a colluding practice but this one-time fine cannot and would not be a deterrent. For starters, industry gross margins in 1QFY21 stood at 19 percent, against 6 percent this period last year. (read more: “Cement: Push-start profitability”, Nov 5, 2020).
A paltry 10 percent fine would still put them ahead of last year—margin wise. The industry cumulatively made a turn-over of about Rs77 billion and an after-tax profit of Rs5.6 billion during the quarter. That’s just in one-quarter. With the way demand is going, a small fine would be just fine!
That is, if fines are actually coughed up. The likely scenario is that the companies would take their case into the lower courts which could even potentially dismiss the CCP case on a technicality—that the federal government cannot impose laws on provincial subjects under the 18th amendment.
The CCP needs to find autonomy to authoritative beat anti-competitive practices in the country. In general, the government can boost competitiveness by creating an investment friendly climate for newcomers, and eliminating all import duties on cement; instead developing strict quality, environmental and safety standards to curb low-quality cement from entering the market.
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