The last two years have seen tremendous cost control in the Indian cement industry. And many claim to have achieved spectacular savings during the period. As Guwalewala, advisor, Gujarat Ambuja Cements points out: "We try to control costs on all fronts. Reduction is aimed at both the cost of power generation and the number of power units required to produce cement". But how far is it possible to cut costs? An analysis of inputs shows that apart from a small portion, directly attributed to efficiency, costs are almost impossible to control. This is because more than 70 per cent of the inputs (value terms) come under the purview of the government. Coal prices, power tariffs, railway freight, royalty and cess payments on limestone are totally controlled by the government -- either state or central. A look at the main inputs will give a clearer picture.

Limestone
Limestone constitutes the largest input in bulk terms -- about 1.3-1.4 tonnes of limestone is needed for one tonne of cement. All cement companies own limestone deposits in and around their factories. The major outgo is in the form of royalty, which varies from state to state. On an average, for per tonne of cement manufactured, around Rs 40 is paid as royalty to the government. Around 16 per cent of the operating costs (note, operating costs include selling and administration costs) can be attributed to raw materials.

Electricity
Electricity is used in three stages -- raw material crushing and mixing, kiln operation and clinker grinding. On an average, 110 units of power (many modern cement plants like Prism and Gujarat Ambuja use lesser units) are required per tonne of cement. As power tariffs vary widely among states, the cost of power also varies widely (see table). So does power consumption depending on the process adopted. On an average, power cost works out to Rs 275 per tonne of cement or 17 per cent of the operating costs. This is an area that has seen a major decline. Four years back, power cost was around Rs 320 per tonne. The decline has mostly been due to more usage of captively generated electricity, as also due to energy efficiency measures.

Tired of the ever-increasing power tariffs and irregular supply by the SEBs, most large cement plants have gone for captive generation. The captive generating capacity with cement plants too increased sharply from 785 MW in 1996-97 to 1333.05 MW in 1998-99. Over the years, cement produced by captive power has increased steeply from 18 mt in 1992-93 to 32.5 mt in 1998-99.

Coal
Cement being energy intensive, electricity along with coal accounts for around 37 per cent of the operating costs. On its own, coal accounts for 20 per cent of the operating costs. It is yet another input that is highly controlled. Average coal prices, currently at Rs 1,074 per tonne, increased steadily at 6.5 per cent CAGR since 1996, except in 1997-98 when they rose by over 11 per cent.

Transportation
Cement being a bulky commodity, transportation is a vital component of a cement company’s cost sheet. It accounts for a large part of the costs involved in distributing cement and transporting the raw materials -- limestone and coal -- both bulky items. In India, around 57 per cent of the total cement output is transported by road, although transportation over longer distance by rail is cheaper. Sea transport is even cheaper with its cost being a mere third of that of road transport. However, its use is limited to coast based units like Gujarat Ambuja and L&T, which have their captive jetties.

Although road transport costs are controlled indirectly by the government through regulation of diesel prices (having abandoned the latest move to let diesel move in tandem with world rates), rail freight is fully controlled by the government. As compared to 1996, rail freight costs of cement was 20 per cent more expensive in 1999. And for coal it rose by 28 per cent in the last three years.

Taxing the Goliath
Most of the controls on inputs get reflected in one indicator -- the total taxes that cement companies pay. Cement today is the second largest contributor to the exchequer after cigarettes. Taxes effectively constitute 30 per cent of the average cement sales realisation. A major part is in the form of excise (Rs 350 for a tonne of cement produced) and sales tax (average Rs 280 per tonne of cement sold). The rest are by way of royalty on limestone (about Rs 40 per tonne of cement produced) and coal (Rs 19 per tonne of cement produced).

Comparing the effective tax rate in India with those in other countries, the Indian government looks a bit too greedy as always. For instance, the effective tax rate in Taiwan is 21 per cent, in Australia it is 20 per cent, in Germany it is 13 per cent, South Korea (10 per cent), Japan (3 per cent) and in Malaysia, it is zero per cent.