The Indian Cement Industry

Introduction

Between 2016 and 2017, there were three judgements by the Competition Commission of India (CCI) against most of the major cement manufacturers in the country. Two of these were for collusion in fixing prices and one for price bidding. This article tries to understand the economic and legal circumstances that led to cartelisation of the Indian cement industry, ways and means to identify them, legal routes available in India, and their limitations.

The cement industry

Cement is an essential raw material for construction. Consumer demand would remain more or less unaffected by a change in price. The capital-intensive nature of production is a natural barrier to entry. Differentiation is impossible either in the cost of production or in the product itself. The market has high market power concentration, and is generally described as oligopolistic. All these factors make the Indian cement industry ripe for collusion.

Market power concentration

Lets first find out how much market power concentration is present in the cement industry.

There are two popular ways to determine concentration of market power — CR(n) Herfindahl-Hirschman Index (HHI). CR(n) is the sum of market share of the n biggest organisations in the market, with values between 0%(no concentration) and 100% (heavy concentration) while HHI does a sum of the squares of market share percentages. Values of HHI are between 0 and 25000. This is a quadratic scale. Values above 1500 are considered moderate concentration and values above 2500 heavily concentrated.

A naive calculation shows the Herfindahl-Hirschman Index (HHI) for the Indian cement industry between 550 and 859 and Concentration Ratio 4(CR4) values between 36% and 46% (45% is considered moderate concentration). This was performed based on a list of 33 companies that produced cement. However, there were a few crucial pieces that were missed. First, some of these companies were found to be investing in each other. Ambuja cements had a 50% stake in ACC. Century had a 4.3% stake in Kesoram, and both belonged to the BK Birla group. Taking this into account, HHI moved to between 652 and 1019, while CR4 was between 41% and 51%.

This calculation still does not consider the regional nature of the industry. Cement factories are generally situated near limestone deposits, which are in 7 different clusters around the country — Satna, Chandrapur, Gulbarga, Yerranguntla, Nalgonda, Bilaspur and Chandra . Transportation is costly, and the markets are divided into five zones — east, west, north and south and central, with market concentration that is expectedly higher than our previous calculations (CR4 of 67% to 90%) . This is extremely high level of market power concentration.

Identifying collusion

Now that we know the cement industry is prone to collusion, how to we go about detecting them? In general, identification is a hard problem because of two reasons. First, hard proof in the form of agreements/email/conversations is hard to find. There have been instances where such agreements were found though, but these are exceptions. Second, using indirect proof is not always easy. There are econometric and legal tools available to detect and prevent collusion. Let’s understand a few of these.

Econometric solutions

Some ways of suspecting/identifying the presence of collusion are

1. Increase in price when demand is low
2. Relatively faster rate of increase in prices compared to production costs in the long run
3. Pattern differences in price variance, and movements of price
4. Pricing pattern changes when a new competitor arrives
5. Overcapacity/under utilisation
6. High profit margins that increase during demand slumps
7. New entrants causing a price war (such as in 2000)
8. Abnormalities in bid submission — two competitors having similar bids, sudden increase in bid amounts, close values in bids, absence of an expected bidder etc

All of the above were found between 2000 and 2010 in the Indian cement market.

Price variations have especially been used by economists as indirect means to detect collusion. Sylwester Bejger (2015) proposed a tool to identify collusion in an industry with the Indian cement industry as an example. Shivani Anand’s 2009 report to the Competition Commission of India identified many of the factors mentioned above to determine collusion in the industry. Their references point to several attempts using game theory, graph models and statistics that are interesting.

History of regulation

The first time regulation was brought in to regulate market power was the Monopolies and Restrictive Trade Practices Act, 1970. However, this act had several limitations, and was especially not suitable for the new liberalized India. The commission set up through the act (MRTPC) was poorly resourced, lacked good definitions and did not specifically mention cartels, predatory pricing, rigging etc

To fix these limitations, the government enacted the Competition Act, 2002, repealing the old MRTP Act. A new Competition Commission of India was created.

An interesting feature in the new bill was the provision of leniency. Because identifying cartels is hard, the act added a provision to impose lesser penalty on insiders that disclose and bring proof of collusion. This provision was used in a recent judgement order in cartelisation in tenders for the Indian Railways.

Another difference in the working of the Competition Commission, as understood by the recent cement bid-rigging case (Case №05 of 2013) is that the standard of judgement “would be on the basis of ‘preponderance of probabilities’ and not ‘beyond reasonable doubt’. “, because the agreement to collude can be done with a “wink or a nod”. This is a good addition, albeit a dangerous one, if the analysts at the commission’s office are not careful enough.

Summary

Collusion among competitors converts a competitive market to a monopoly. A monopoly tends to maximise private benefits over benefits to the society. Collusion prevails in markets with moderate to high market power where there is high barrier to entry, no threats of substitution and less options for product differentiation. Prevention of collusion in such scenarios is something a free market without regulations fail at. In the interest of public benefit, it is necessary for the state to intervene.

Identification and proving collusion is hard. There are legal and econometric tools available, which can, and must be used in the best possible way to identify and prevent collusion. We must also know that legal processes are costly, and should not come in the way of conducting business fairly.

References

1. Competition Commission of India case №52 of 2006 (cartelisation)
2. Competition Commission of India case Case №29 of 2010 (cartelisation)
3. Competition Commission of India case Case №05 of 2013 (bid rigging)
4. Bandyopadhyay, Arindam and Kuvalekar, S V and Basu, Sanjay and Baid, Shilpa and Saha, Asish (2008): A Study of Residential Housing Demand in India
5. Shivani Anand (2009): Identifying cartels using economic evidence — A case study of the cement industry
6. http://economictimes.indiatimes.com/articleshow/14737382.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst (Accessed 4-Mar-2017)
7. https://www.justice.gov/atr/herfindahl-hirschman-index (Accessed 4-Mar-2017)
8. https://docs.google.com/spreadsheets/d/1pb3dM_qUQ88QHbYCShi7LSYZ4tOaI7DMnyR1eLS8HS0/edit?usp=sharing (Data sourced from annual reports of all firms)
9. https://www.slideshare.net/pulsar5583/competition-in-indian-cement-industry-a-case-of-collusive (Accessed 4-Mar-2017)
10. https://www.slideshare.net/Dread_95/mrtpmonopolies-and-restrictive-trade-practices-act (Accessed 4-Mar-2017)
11. Competition Commission of India case №03 of 2014 (Cartelization in respect of tenders floated by Indian Railways for supply of Brushless DC Fans and other electrical items.
12. Sylwester Bejger (2015): Screening for collusion: Evidences from the Indian cement industry
13. https://docs.google.com/spreadsheets/d/19Ni0tPSdw_kmcXr17AnYAtAqv5w9FF5CTsPDsTCt49g/edit?usp=sharing