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.