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Cement cartel for better or worse

An inquiry report of the Competition Commission of Pakistan (CCP) has found massive profit-taking due to cartelization by the cement sector. The inquiry report was finalized for the cement units in the North Zone of All Pakistan Cement Manufacturers Association (APCMA) as the Sindh High Court had restrained the CCP from using material collected from the raids at offices of cement companies in South Zone (Sindh).

The inquiry report has inputs from the Federal Investigation Agency (FIA) regarding forensic audit of all the electronic evidence collected from the offices of cement companies and the APCMA head office, Lahore. The names of the owners of mobile phone numbers used in ‘WhatsApp’ discussions etc were obtained from the Pakistan Telecommunication Authority.

The CCP inquiry has suggested that there was evidence of cartelization among the APCMA members related to production quota distribution based on installed capacity from 2014 to 2020.

The inquiry highlighted that the cement manufacturers also maintained a dispatch/sale quota and the APCMA even posted designated staff at various cement units to ensure that the plants did not sell cement exceeding their allocated quota.

Based on the evidence available from the WhatsApp groups and other electronic communications obtained after the search of APCMA Head Office and offices of cement companies in the North Zone Punjab, the CCP inquiry revealed that there were territorial allocations and even price fixing among the members.

The inquiry report has mentioned that the data at the smartphone of Shoaib Ahmed of the Marketing Department, D.G. Khan Cement, highlighted the presence of a WhatsApp group named “APCMA Marketing Officials” created on 15th November 2018.

The report has highlighted that this group was used as medium to communicate and decide to fix prices in the North Zone.

The APCMA even released maximum retail price for various cement plants and there was evidence that the Association used to make collective decision regarding passing on the impact of reduction in the input cost to the consumers.

According to a CCP official, based on the market demand it is estimated that the consumers had to pay around Rs40 billion additional amounts as the cement prices were increased up to Rs50 per bag in May, June and August 2020.

“The increase made in July 2019 was based on the grounds that the government has restricted axle load and it made the freight cost higher,” the official said, adding, “But there was no reason for the increase this year as not only the input cost was declining but the demand too was on the rise.”

He said the price increase that started in April this year prompted the CCP to inquire into the affairs of the cement sector.

There are around 24 operational plants belonging to 16 companies in the country that produced 47.8 million tons of cement in the 2019-20 financial year.

The report has highlighted that cement rates witnessed an upward trend when the global prices of coal and oil were declining in the middle of this year and the interest rates too dropped to single digit.

The CCP inquiry was held from May to August 2020, and the analysis of the data also showed that the earning per share (EPS) of cement companies during the July-Sept 2020 quarter increased significantly compared to the same period last year.

The report has highlighted that during this period EPS of Bestway Cement increased by 502%, Lucky Cement by 133%, D. G. Khan Cement by 75%, Cherat Cement by 191%, Fauji Cement by 138%, Maple Leaf Cement by 115% and Kohat Cement by 473%.

The CCP inquiry report has also shown a copy of WhatsApp image obtained from the evidence collected in raids, and compared it with the data released by the Pakistan Bureau of Statistics of later period.

“The projections shared at the WhatsApp group were later found to be correct as the prices ended in that range,” the CCP official said.

The inquiry report has also highlighted that there was not any dominant player in the cement sector and the largest manufacturer Bestway Cement only had 18% of the market share, followed by Lucky Cement at 15% and D.G. Khan Cement at 13%.

The commission has decided to issue show-cause notices to the APCMA and the cement companies of the North Zone that are in Punjab and Khyber Pakhtunkhwa.

What next?

To begin with, unless a similar investigation is undertaken in the Southern region, no action should be taken against the units located in the Northern region. Else it will fall in ‘two laws in one country’.

Going a step further, it has to be determined, were the decisions made for the good of industry? The logic is simple, capacity increases in cascading manner; therefore, some sort of understanding has to be reached for the collective good.

Having said, it is necessary to undertake ‘cost audit’ of cement manufacturers. Analysts are of the opinion that maintaining uniformity of prices in both the regions is the collective responsibility of all the players.

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