A 2007 article written by Rafaelita Aldaba, a senior research fellow at the Philippine Institute for Development Studies (PIDS), cites a study of the cement industry showing that imports arising from trade liberalization do not have a favorable effect on domestic firms and do not bring down local prices. She noted that cement firms are characterized by collusive behavior. They manifest a tendency to engage in strategic behavior and use of anti-dumping and safeguard measures as protective instruments to control competition in the domestic market.
“While the elimination of trade barriers is a necessary condition, it is not sufficient to generate effective competition if firms can successfully engage in anti-competitive practices. To effectively discipline domestic firms with collusive tendencies, trade liberalization must be accompanied by strict competition policy,” Aldaba wrote.
But Ernesto Ordoñez denies the existence of a cartel in the cement industry. He said Cemap is against oligopoly or cartel since this is against the law and his association adheres to the law.
“First of all I’m the president of the association so as president of the association I’m responsible for following all the laws of the country. If there were a cartel the market share [of each of the three manufacturers] would not change because they agree. But the market shares are changing. For example you have 30 percent I have 40 percent if there’s a cartel ‘don’t disturb me I won’t disturb you.’ But you see your 30 percent is dropping because I’m fighting to get your your market share so the market share is changing,” Ordoñez tried to explain and refute the allegations.
Ordoñez also argued that the cement prices are not similar among the players. Of course, he explained, the price difference is not so big, but that is because the production cost of all three is somewhat similar, he said.
“And what you find is that while they are not 30 percent apart they are different in the prices. But of course you cannot really afford to go much higher because somebody else will get your market share. So they compete. Now the question is maybe they are at the high price. Their return on investment or return on assets is very low. In the government they allow it at 12 percent. This return on assets is very low. For the last many years it’s around five percent. Some of them didn’t give dividends in the last several years.”
Shareholders can’t even get right dividends because the competition is too tough among the companies in addition to the very stiff competition brought by imports, he added.
For instance, Ordoñez said, Vietnam imposes a 35-percent tariff, Thailand 10 percent, Malaysia 10 percent although it’s on hold. The Philippines is five percent and the lowest although it’s also on hold.
“When the imports come in they are more expensive than ours. They are not coming in because if they are high they just don’t come in. And if zero percent tariff maybe if its 50 percent but its zero percent and they are not coming in, which means it’s expensive. It’s misleading because in reality were at the fifth level.
“If the local prices are very expensive imports will come in like in the case of chickens,” he said.
“And our power cost is so high that actually you will be surprised that it’s on that level because if we are double the price of other countries, which means that there is no collusion here. It means there is no cartel. If there’s a cartel they will fix it on high price. The imports are not coming in so there is no reason there’s a cartel.
There’s not much logic in the explanation given. This is why the government is still convinced there is a cartel.
Breaking the cartel
To break the cartel, the government agreed to give incentives to Eduardo Cojuangco’s new Eagle Cement Plant in Bulacan. The plant is expected to cost P6.73 billion and produce 1.08 million MT or 26.6 million bags of Portland cement.
The company said that it would sell cement 25 percent cheaper than the current prices. The new plant would enjoy zero duty for the importation of capital equipment and an income tax holiday of four years.
The BOI also approved the application of the Yuchengco group of companies to set up a cement factory in Looc, Malabuyoc, Cebu.
Eagle Cement, a wholly-owned Filipino company, was scheduled to start production in January after putting its operation on hold due to destructive typhoons that hit the country in 2009.
BOI said Eagle Cement has requested for the amendment of the timetable. The company was supposed to begin operations in December 2009 but asked for a one-year postponement because of the typhoons.
Eagle Cement plant, which targets to service areas north of Manila, Nueva Ecija and Nueva Vizcaya, is located in Akle, San Ildefonso, Bulacan. The plant construction started in March last year.
DTI said it was waiting for the Filipino-owned cement firm to start commercial operations so that they can be able to determine if cement in the country is overpriced.
Another firm, the South Western Cement Corp., a company said to be owned by businessman Alfonso Yuchengco, is not pushing through due to lack of capital, according to the BOI.
The plant could have an annual capacity to produce 1.08 MMT equivalent to 26.6 million bags Portland cement a normal capacity of a facility but expandable to 48 million bags.
South Western Cement had committed to produce cement at ex-plant prices 25 percent cheaper than current prices. The BOI granted income tax holiday to the firm in exchange for passing cost savings to consumers through lower prices.
The government justified the possible entry of these two players with its supply-demand forecast for 2005 to 2012.
According to the Medium Term Philippine Development Plan (2004 to 2010) crafted by the Arroyo administration, the existing supply of 462 million bags in 2005 is expected to remain the same until 2012.
The demand of 249 million bags in 2005 is forecasted to increase by a high 12 percent a year, reaching 491 million bags in 2011 and 550 million bags in 2012.
This projection creates a supply deficit of 29 million bags in 2011 and 88 million bags in 2012, a justification that the two cement plants, with a combined output of 80 million bags or two million metric tons per annum would be enough to lower prices in the domestic market.
Cement production is a significant industry in the country with eight companies presently operating. There are around 17 integrated plants in the Philippines based on Cemap’s 2009 record. The industry employs around 120,000 people and as of 2009 annual taxes amounted to at least P11 billion. Total sales last year reached P72 billion for a total volume of 14.5 million tons.
In the first half of 2010, domestic sales reached more than eight million metric tons imports however were around less than 7,000 metric tons. The country’s total demand for the period is 8,288,317 metric tons, according to Cemap. –ANGELO SAMONTE, Manila Times
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