A recurring quandary

A recurring quandary

Obviously, the stated readiness of Indonesian cement producers
to increase supplies in order to alleviate the current domestic
shortages must seem at least hint of relief to consumers.

As has been reported, the Indonesian Cement Association, in a
meeting with the Director General of Basic Chemical Industries
the other day, promised that producers will increase their output
to meet the increased demand. To bolster their resolve they
reportedly plan to import 320,000 tons of clinker -- a substance
used in the production of cement -- during the second half of
this year. They even said they were willing to import cement if
their increased output failed to meet the demand.

Cement prices are reported to have risen to levels far above
local reference prices in a number of areas, particularly in
Java. But while serious shortages like this always make the news,
the problem is actually not a new one.

Shortages in cement supplies occur almost every year. Usually,
reports of shortages are followed by a dialog between the
government and cement producers, who usually propose an increase
in local reference prices. And often their demand is met.

Price references are regarded as necessary by the government
because cement is a strategic product, needed by almost every
family in the country. As far as the producer is concerned, this
reference price level is determined on the basis of production
costs and deliveries, plus profit margin. On the consumers' side,
of course, prices must be kept low enough so the public can
afford to buy the commodity.

At present, the country's nine cement factories have a total
production capacity of 20.1 million tons. The market demand
reached some 19 million tons last year, but is expected to be
around 20 million tons this year and to continue to rise in the
coming years. This means that, at present, the capacity is almost
at the same level as demand.

Cement is a product that cannot be stored for very long.
Production therefore has to be carefully calculated so that it
will not exceed demand by too much. On the other hand it must
also not fall short of the need.

The demand for cement, the country's main construction
material, usually goes up dramatically during the dry season when
builders try to take advantage of absence of rain. The rainy
season usually brings a sharp decline in demand.

The government has reportedly licensed the construction of 20
new cement plants with a combined capacity of 32.2 million tons
and at a total investment of US$4.7 billion. Apparently, however,
the sponsors have kept delaying construction of their projects.
The obvious question is, why?

Clearly, for the government, the problem is a rather delicate
one. On the one hand, the authorities are not likely to eliminate
the reference price system because consumers make up the majority
of the population and should be protected. On the other hand, the
government must create an environment that is conducive for
investments in this particular sector.

Offering an attractive environment is important because the
country needs a production capacity that is well above the levels
of consumption. This excess capacity will give producers the
necessary leeway to increase output whenever called for. During
seasons of lower demand, the surplus output can be exported.

The apparent reluctance on the part of investors to carry out
their already licensed projects could be an indication that, from
the producers' point of view, the present reference price level
needs revising. But whether or not the government can do this
depends, of course, on the fair balancing of production costs
versus consumer needs.