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.