The cement tug of war

The cement tug of war

The way the Indonesian government is currently trying to arrest the steep rise in cement prices will not put an end to this perennial problem. Another wave of price increases is highly probable next year as the government is simply extinguishing the fire without investigating its root causes.

We wonder why the government continues to see the problem as a question of supply and demand every time cement prices increase. If there was a shortage, then a rise in prices would not be considered unusual, but only as the normal work of market forces. The fact is that the country is hit annually with higher cement prices and although it has been this way over the last few years, the government still considers the trend unusual.

Instead of beating around the bush, we feel that the government needs to look at the problem from other perspectives. In our opinion, the government should thoroughly investigate the chain of distribution that begins with the factories and finishes in the hands of retailers. They also need to review the real function of the local price references for cement and then introduce a sensible import policy.

Minister of Industry Tunky Ariwibowo pointed out on Monday the 20 percent increase in demand as being higher than estimated, thus citing it as the main reason behind the steep price increase. At a hearing with the House of Representatives on Tuesday, however, the cement industry association claimed that the supply from domestic producers actually increased by more than 21 percent between January and September. The association even notified the government as early as last December about its program to produce 21.3 million tons this year, or 93 percent of the total installed capacity of its members.

These contradictory explanations cause us to suspect that there are other factors besides the perceived shortage that have pushed cement prices up.

Both the government and cement producers argue that the demand has been rising by an unusually high rate during the current dry season as contractors and developers accelerate the implementation of their projects. It would be strange if the ministries of trade and industry, who meet annually to discuss cement demand and production with producers, were not well apprised of the seasonal cycles in cement consumption. The demand cycle could have been dealt with by better stock management.

We tend to see the problem more as a tug of war between the government and cement producers over their differing opinions as to what reasonable levels of cement prices should be. In January, 1993, the government raised the local price references for cement by only 9.3 percent on average, as compared to the 12 percent to 15 percent asked for by the producers. The producers grudgingly accepted the new prices because they knew that the government-set price references are merely guidelines that are not legally binding. Indeed, we have never heard of any cement producers being fined for violating the price references.

That is quite an anomaly. Over the past few weeks, the main controversy has been over the rise of cement prices way above the local price references. Since the price references are not ceiling prices and not legally binding, we don't see any point in comparing the market prices with the price references. After all, as the producers acknowledged to the House, the actual retail prices depend on market forces. So, what is the meaning and real purpose of the price references?

Instead of periodically fixing meaningless price references and resorting to a contingency measure of allowing imports every time the cement price spirals, the government should pursue a more sensible, yet permanent import policy with reasonable tariff rates. Opening up the market to imports with tariffs of five percent, for example, will keep the domestic producers on their toes. Cement is a bulk commodity and is costly to transport. Foreign made cement will not automatically flood the Indonesian market simply because of the opening of imports because sea freight costs will make the prices uncompetitive.

The latest cement crisis is making it more imperative than ever for the government to expose the industry to the market forces by abolishing the mechanism of local price references. The authorities also need to open the domestic markets to imports and facilitate the smoother implementation of cement investment projects. Such a policy will prevent collusion between the producers and distributors and will provide the government, end- users and cement investors with more reliable indicators of the supply-demand equation.