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.