Keep cement tariff at zero

Last week, the Department of Trade and Industry (DTI) warned cement makers that the government would impose a price cap on the construction material barring a return to normal price levels.

The DTI also threatened to file cases against manufacturers and retailers in line with the Price Act, which provides for legal action against profiteers and hoarders, with fines of up to P2 million and imprisonment to boot.

The warning came on the heels of consumer complaints about the high prices, if not the scarcity of this crucial commodity for the reconstruction effort in typhoon-ravaged areas.

This will not be the first time that government and cement makers will lock horns on prices.

To recall, manufacturers had to fend off allegations of cartel-like behavior, when the industry sought high tariffs against imports several years ago.

Fast-forward to 2010 and the government is deliberating on a proposal from the industry’s lobby group to raise tariffs anew.

The proposal to raise import duties comes at a bad time, as a vast section of the population has yet to complete repairs and reconstruction following two devastating typhoons in the fourth quarter of 2009.

In calling for a higher tariff, the industry pointed to losses inflicted by cheap imports at a time when manufacturers have yet to recover from the economic slowdown.

But late last year, a leading player said that it already hit its full-year target at end-September, citing strong sales from the continued expansion of the business process outsourcing (BPO), housing, tourism and public infrastructure particularly in Mindanao.

This begs the question: If manufacturers are having a tough time, then why drive away customers by jacking up prices?

Unless of course, business was so good that cement makers can afford to raise prices.

The problem with rising prices of construction materials like cement is that they have a big multiplier effect, in line with the contribution of the construction industry to the wider economy.

Higher prices of this key construction material would dampen demand, thus not only undermining the post-typhoon reconstruction effort, but also the overall economy’s recovery. Fiscal pump priming after all comes largely in the form of public infrastructure spending.

As it is, inflation already jumped by at least 50 percent from 2.8 percent in November to 4.4 percent the succeeding month.

Rising prices of fuel—a key component of cement—were largely responsible for the inflationary run-up—an eight-month high, according to the National Statistics Office.

We should expect to hit another inflationary milestone this month given the high prices of cement—not to mention chicken, flour, among other commodities.

If—as the cement manufacturers claim—the problem of high prices and tight supply lay in unscrupulous dealers and retailers, then this points to a likely price hike industry-wide. For the middlemen hoard supply partly in anticipation of a price increase.

Indeed, another top cement maker admitted last week that it was raising its prices.

Having established the premise, should the DTI proceed with a price cap?

We think not.

As in the case of the short-lived price ceiling on fuel, placing a cap on cement prices—while allowed by law—would only exacerbate the situation.

A black (or grey) market may develop, thus undermining the viability of the domestic cement industry.

Despite our commitment to freer trade, the Philippines’ cement-making capacity exists, so why not make full use of it. If the industry were uncompetitive, then let it run itself to the ground. Market forces would make sure of that.

As in the case of oil, state importation of cement would only add to the government’s fiscal straits.

In October, the government already breached its full-year budget deficit ceiling. For this year, it expects another fiscal gap, as it plans to spend more to firm up the country’s economic recovery.

Although reconstruction runs high on the government agenda, the whole idea of forming a joint public-private commission to handle the post-typhoon work was to orchestrate a multisectoral effort amid the state’s fiscal constraints.

Given the above, a solution to the current high-price regime in the cement market would mean bringing down tariffs on imported varieties and on alternatives to the construction material.

Under global trading rules, tariffs are a prescribed tool for facilitating market adjustments to supply disruptions or inordinate control over pricing by select parties.

The relatively lower prices of imported cement stemming from small or no tariffs would place a check on profiteering by domestic suppliers.

An earlier Palace directive imposing zero tariff on imported cement would last only until this month.

Malacañang’s zero-tariff order on cement should therefore stay.