Cement prices raised

Cement prices raised

The government finally bowed to the "market forces" by legalizing the prevailing cement prices which have been hovering at more than 40 percent above the 1993 fixed local price references since last July. The new price references, which were set by the trade minister and became effective on March 31, are an average of 40.7 percent higher than the 1993 ones.

We deliberately put quotation marks around the words "market forces" because we have doubted that the steep rise in cement prices from last July had really been entirely the work of an open market mechanism. Even the various ministries had differed widely in their conclusions about the reasons behind the price increase. But anyway, the prevailing prices since last July, which actually violated the government-set price references, have now been legalized. Though the word legalize is actually not relevant because those who have been selling the building material way above the sanctioned price preferences have never been penalized.

The government did not explain as to whether the new prices had been set after thorough investigations into the structure of the cement production costs. But the fact is that the new prices are now about the same as the international market prices.

There is, nonetheless, a new clause included in the trade minister's decree on the 1995 cement price references that allows for price reviews every January and July. But the clause, we think, is rather ambiguous, as it has not been clearly ascertained whether the review will be made against the international prices or the local production costs. Nor does the decree stipulate what kind of penalties will be taken against those who sell cement above the local price references.

So we reckon the new price references will remain simply price guidelines for the various areas. Guidelines which may be violated by cement producers or distributors without any risk of being punished. Cement manufacturers might simply cut down on their production on such excuses as machinery downtime for repair if they want to jack up prices.

The government hopes that the higher price references will encourage investors to carry out their cement projects which were licensed years ago but which have not been implemented due to various reasons.

We don't think the new price references will have a significant impact on inflation because as we mentioned previously the actual prices have by and large been the same as the newly set prices since last July. We think contractors, too, have calculated their prices according to the prevailing prices and based on the 1993 government-mandated price references. Some problems may nevertheless have an impact on the contractors for government projects if their cement costs were based on the 1993 price references.

Many analysts have contended, though, that as long as the cement trade is not liberalized by freeing imports and exports and by removing the restrictive marketing zone ruling, cement users will remain at the mercy of producers because the industry has long been dominated by only one or two business groups.

In fact, the heavily regulated cement trade has been the main hurdle to the implementation of new cement projects. We don't think freeing imports would flood the domestic market with foreign made cement in view of the high freight costs of such a bulky commodity. But a free-trade mechanism will not allow much latitude for domestic producers to jack up prices as they like because if the price differences are too wide, imports will flow in. The government policy on cement imports has so far been a stop-and-go-policy whereby imports are suddenly freed whenever prices tend to rise steeply and the import lid is closed down when the prices become stable. Such a policy naturally does not allow enough time for companies outside the cement sector to develop a network of suppliers overseas and domestic distribution networks.