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.