Freeing cement prices
Freeing cement prices
Indonesia's Minister of Trade Satrio B. Joedono revealed last week what we hope will eventually set a precedent for restoring market forces in the prices of industrial products still subject to government control. Joedono told newsmen that the domestic cement prices, which rose steeply last year to far above the government-set local reference prices, need to be adjusted to international market quotations. He saw the adjustment of domestic prices to the level of international ones as crucial for encouraging new investments in the cement industry to cover the widening gap between supply and demand.
We think that Joedono's argument is quite sensible. If the building material remains subject to a government-set price range new investors will always be discouraged from entering the industry because a government ruling is always rigid while market developments are fluid.
Obviously, the most immediate impact of the price adjustment will be a rise in the cement prices from the price range mandated by the government in 1993. But because the actual cement prices, since the second half of last year, have been way above the government-fixed price range and have in fact neared the international market quotations, the net impact would be insignificant anyway. What the price adjustment will do is to simply legalize the prevailing prices. But the benefit of removing the price control is obvious: Relative price stability.
Most countries have never experienced long-term shortages of industrial goods that are not subject to trade barriers. However, such relative price stability will take place only if the removal of the price control is coupled by the abolition of regulatory restrictions on cement imports and exports. Under such a relatively free market mechanism (without rigid price control) domestic producers will not have much latitude in raising their prices to unreasonably high levels because imports will flow in to correct any supply-demand imbalance. On the other hand, a domestic surplus will not cause a price collapse because the producers are free to sell on the international market.
Under the present price control policy, the government has often been forced to take contingency measures such as opening up imports and imposing tax surcharges or quotas on exports whenever a domestic shortage occurs. But such measures are most often too late to generate the desired impact because of the time lag between the introduction of the measure and the arrival of imports. Moreover, such measures, however short term they may be, are inconsistent with the government's pronounced objective of steadily enhancing free and open trade. They also damage the reputation of domestic producers who have invested a great deal in promoting exports. No wonder, such inconsistency has hindered the implementation of more than 12 new cement plant projects already licensed by the Investment Coordinating Board. And no wonder the domestic cement market continues to be dominated by the Indocement group.
It is not clear yet whether the government will free the cement prices to the market forces by abolishing the mechanism of decreed price range or will instead maintain the present control mechanism but at a higher price range (near the international market quotations). But since the price control mechanism has often failed, as can be seen in the annual increases in the cement prices to levels far above the fixed price range, we don't think the government will maintain the price-control mechanism at the risk of being "rebuked" again by the market forces or by the cement oligopolists.