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.