Economists question government's cement policy

Economists question government's cement policy

By Riyadi

JAKARTA (JP): The consequence of the recent price increase is
immense, prompting many concerned parties to speak up and call
for the improved handling of the cement industry.

A number of critics, including economists Rizal Ramli and Kwik
Kian Gie as well as analyst David Chang, have called for the
abolition of the government's cement pricing guidelines which are
not based on market forces, thereby creating only artificial
prices for cement.

The cement sector has been highly regulated, Rizal said.
Consequently, the cement market has never seen fair competition
and consumers have no alternative but to accept the high cement
prices.

Sharing Rizal's view, David Chang said when the government
starts establishing rules on any economic sector, the sector
tends to becomes inefficient and in the end it's the public who
suffers most.

He said the government, in regulating the cement industry, is
favoring producers and sacrificing consumers, notably the common
people.

"The government's decision late last month to increase cement
local reference prices by 40 percent -- which was later reduced
to 30 percent -- is only beneficial to existing cement producers
but not to the country," he told The Jakarta Post.

The price raise may push the inflation rate up into the
dreaded double digits. Other sectors are seriously hit,
especially the property sector, and the public is sacrificed for
the sake of the giant conglomerates which control cement
production and distribution networks in the country.

"The price increase is only good for Indocement and Semen
Cibinong," the analyst said, referring to the two largest private
cement producers PT Indocement Tunggal Prakarsa and PT Semen
Cibinong, both listed on the Jakarta Stock Exchange.

Critics saw the price increase as too high because even with
the old reference prices, which averaged Rp 6,555 (US$2.96) per
40 kilogram sack, cement producers could still generate enough
profits.

According to the government's data presented to the House of
Representatives last September, the production cost of one ton of
cement was Rp 120,000 (US54.29), or Rp 4,800 per 40 kilogram
sack.

The government itself could not give a satisfactory
explanation as to the reasoning which lead it to increase the
cement reference prices.

The government only insisted that the old prices were not high
enough to attract new investors to expand the industry's
capacity.

Coordinating Minister of Trade and Industry Hartarto, who
acted as Minister of Trade in the absence of Satrio B. Joedono
who was abroad, explained that the increase was designed to
attract new investment in the cement sector and to allow for the
sales of imported cement in the country.

The government said that allowing imports was the only
shortcut to cope with the domestic cement deficit, but argued
that the industry's capacity should be expanded to meet the
rising demand and to secure price stability.

However, Rizal contended that if the government wants to
attract new investment in the cement sector, it should give
incentives, such as fiscal incentives, only to newcomers.

However, Minister Joedono explained upon his return to
Indonesia that the price increase was aimed at stimulating the
existing producers to expand their production capacity, and not
at attracting new producers.

Joedono said the new cement prices would make the shares of
cement companies listed on the stock exchanges more attractive
to investors so that the existing producers could raise more
funds for reinvestment in the cement industry.

Cement share prices

Commenting on Joedono's argument, Chang said that the cement
price increase did attract investors but in the short-term only.
And investors remain worried about the risk of investing in the
cement industry.

"It's true that the news of the reference price increase has
stimulated investors to buy cement stocks. But it's only
temporary. Investors are always worried what will happen to
cement stocks if the government removes its protection of the
industry," Chang said.

He said the government's protection of the cement industry is
simply not necessary because without the protection, the industry
by nature has its own natural barrier. Not just anybody can go
into the business because it takes huge capital and this serves
as a natural entry barrier.

Last year, Chang said, the market sentiment towards cement
stocks was bad despite the cement shortages which pushed up
cement prices.

Semen Cibinong did not perform well, Indocement's shares were
just too expensive with a price earning ratio of 21.2 times and
the state-owned PT Semen Gresik had too little volume of shares
floated on stock markets.

"This year the market sentiment is getting better due to
continuing cement shortages, followed by the government's
decision to increase reference prices," Chang said.

The news of the cement price increase is good for cement
shares. The price of Semen Cibinong's shares is good, supported
by ample foreign demands. Indocement is good too, but its shares
are still expensive with the projected price earning ratio of
17.4 times, Chang said.

When asked what would happen if the government liberalized the
cement sector, Change predicted that demand for cement shares
would temporally drop, but in the long run it would be better
because investors would not be worried about what the government
did next.