Four factors cause cement mart distortion
JAKARTA (JP): Oligopolistic practices, collusion between producers and distributors, regional zoning of marketing and the government-set local price references are major causes of annual cement market distortion in the country.
"Those four factors should be eliminated if we want to solve the country's continual cement shortages," economist Rizal Ramli told reporters here yesterday.
Shortages occur every year, particularly during a dry season when construction activities increase, even though the domestic utilization of cement is lower than the country's total production capacity.
Domestic demand for cement, according to Minister of Industry Tunky Ariwibowo, is estimated at 20.1 million tons this year, while the country's cement companies have a total production capacity of 21.3 million tons per annum.
Rizal said that oligopolistic practices within the cement industry allows the companies to set prices at whatever level they wish.
He said that the producers, one of which controls nearly 50 percent of the market share, frequently urge the government to increase local price references to unreasonable levels on the grounds that production costs have increased.
Citing an example, he said that when the electricity billing rates rose by 11 percent early last year, "they urged the government to raise cement prices by nine percent, far higher than 1.65 percent. This was their actual increase in the cost of production resulting from the power hikes."
He said that costs for cement production in Indonesia are actually low because it is supported by the low costs of energy and labor combined with an abundance of raw materials.
Rizal, who is also the managing director of a consulting and research agency Ekonit, said that it was intolerable to allow a single private producer to control more than 30 percent of domestic cement market share because it is against the Constitution.
PT Indocement Tunggal Prakarsa, a company controlled by tycoon Liem Sioe Liong, operates production units with a total capacity of about nine million tons per annum, more than 42 percent of the country's total capacity.
"The government, therefore, should lift the barriers for the entry of everyone into the cement industry to reduce the domination of a single producer," he said.
"The government should also stop providing licenses for the expansion of a major producer or allowing it to acquire other cement companies," he said.
He said that, now, the most important thing was restructuring the industry with an aim of increasing efficiency.
The government should also abolish the price reference system, which benefits producers rather than consumers, he said.
The recent increases in cement prices in several parts of the country indicate that the reference system is not effective.
Two state-owned cement producers, PT Semen Padang and PT Semen Tonasa, told the House of Representatives last week that they had unilaterally raised prices to cope with increasing production costs. Minister of Industry Ariwibowo said this week that their unilateral actions were not against regulations.
"The current price references actually make cement producers enjoy extremely high profit margins at an average rate of more than 30 percent," Rizal said.
He explained that one of the country's major cement producers enjoyed a gross profit margin of 45.8 percent or a net profit margin of 40 percent in 1991. The decrease of its gross profit margin to 34.9 percent last year was mainly caused by its acquisition by another producer.
"The high profits resulted from a combination of high price levels and low production costs," he said.
Rizal also said that the separation of ownership between producers and distributors will reduce the oligopolistic power of producers while encouraging competition among retailers.
He said the regional zoning of marketing has also given more power to producers in controlling the market.(05)