Govt sees manipulation

IS there a cement cartel? Why are cement prices so high?

No one really knows who’s telling the truth. The producers say they are doing nothing wrong, and that the price of cement here is less than that in Brunei, India, Indonesia and even Japan.

The government sees a cartel that is manipulating prices. Its people firmly contend that that cement prices in the Philippines are among the highest in East Asia.

Cement producers, of course, deny, that claim.

Just after the release of the 2010 Investment Priorities Plan (IPP), which has provisions granting incentives to new entrants into the cement industry, the Board of Investments (BOI) said cement prices in the Philippines are among the highest in the region.

The Department of Trade and Industry even said that it considered filing profiteering charges against cement manufacturers after a BOI study disclosed that cement prices in the Philippines are the second highest in Asia.

Trade department added that President Benigno Aquino himself had vowed that his administration would go after the cartel and protect the consumers.

According to the BOI, cement price here costs roughly $4.56 per 40-kilogram bag as of early this year, higher than the $3.63 average for nine countries in the region. Today, the DTI says a 40-kg bag costs about P210 to P220.

Indonesia has the most expensive cement price at $4.62 per bag, followed by the Philippines, whose average price is nearly the same as that in Japan.

After these three, are Malaysia, Taiwan, Thailand, South Korea, Vietnam and China. Among its Southeast Asian neighbors, the Philippines’ cement prices are two-thirds more than Vietnam’s, a fifth more than Malaysia’s, and roughly 40-percent higher than Thailand’s.

Trade liberalization did not lower domestic prices. And according to a study made by one UP expert, imports arising from trade liberalization do not have a disciplining effect on domestic firms. The study concluded that cement firms are characterized by collusive behavior to manipulate local prices. These firms engage in strategic behavior and use anti-dumping and safeguard measures as alternative protection instruments to weaken the power of imports’ to force locally produced cement prices to go down.

In the 1980s, the government started to pursue neo-liberalist policy deregulating almost every industry.
And as the cement industry invested in capacity expansion in the early part of 1990s, they encountered serious financial difficulties because of the 1997 to 1998 Asian financial crisis.

Then the multinational cement companies came, merged and acquired domestic companies in distress.
The result: Locally owned firms are now controlled by the world’s Big Three cement companies: Holcim, Lafarge and Cemex.

Before the 1997 financial crisis, cement prices remained stable with consumption generally rising during the dry season and falling during the rainy months. There were observable price increases in 1999 which coincided with the completion of the mergers and consolidations in the industry.

In December 1998 the price went up from P45 per 40-kg bag to P70 in February 1999. In May 2000, the price breached the P100 mark, reaching P132 per bag in May 2001.

Yet, there was an oversupply of cement during that period when, because times were hard, the demand was low. Analyst said the only reason for the price increases was price manipulation. The industry’s three cement makers were coordinating their prices. They were not competing against each other. They were acting as a cartel.

In addition, during that period of increasing prices, the world market was experiencing excess in cement capacity and imports were coming in at prices lower than locally produced cement.

Cemap: Not overpriced
Interviewed by The Manila Times, Ernesto Ordoñez, the president of the Cement Manufacturers Association of the Philippines (Cemap), denied that the cement price in the Philippines is among the highest in East Asia. Ordonez said that at present the local price is less expensive than Brunei, India, Indonesia and even Japan.

“They say we’re the highest in Asia that’s not true we’re the fifth highest. If you look at the price of our cement compared to price of other countries we’re not the most expensive. We’re the fourth or fifth,” Ordonez said.

“The reason why people think that we’re the highest is because at one time the cement price was very low. When it was very low the industry lost P11 billion, the price was then below P100. Now it’s over P200 so they ask ‘why did it double?’” Ordoñez added.

People tend to think that price is high in the Philippines because more than 10 years ago the price was very low as a result of excess cement dumped into the country. They are using that level as a benchmark to peg today’s cement prices, Ordonez said.

As a result of the dumped cement the whole industry was forced to sell at very low price because if it had not it would have lost all. As a result, the cement industry’s losses amounted to around P11 billion, he continued to explain.

“It went to a certain level down to that and up again. Once it was in the normal level abd you track the prices, you will find that the increase in cement over all these years, about 12 years, is less than the inflation rate. But if you look at it with the base below P100 over here of course it’s more than the inflation rate. But it’s unfair to use that base because that is unnatural. That was when the industry had to sell at a loss to meet the price of the dumped cement, and the industry lost P11 billion,” he said.

The government cannot use that as a base, Ordoñez argues, for if it uses that figure as the base plus the inflation it will be less than P200 a bag, he argued. Imposing that price, Ordonez said the industry will lose P11 billion every year making cement investments no longer viable to us, the investors.

Without a cement industry the country will be forced to rely on imports, which could make supply unstable. Ordoñez predicted two scenarios: first, if there is shortage in the world there will be very high prices and, second, if the country doesn’t have cement there will be standstill in infrastructure development.

“You want your own cement because first of all you want stability. With your own cement you can plan.
Yyou want to be sure where the cement is coming from and number two the stability of the price. Not only must the supply be stable but also the price. If you don’t have your own cement manufacturing what happens abroad it will affect prices, it will go sky high,” Ordoñez explained.

High cost of production
Cement manufacturers complain that prices are expensive because energy and transport prices are high in the Philippines.

“Look at our power cost. Power is a small percentage of other industries like garments or shoes. But for cement manufacturing power is cement because 40 percent of production costs is power. So it’s all power when you’re buying cement you are buying power.”

“Electricity prices in the Philippines are double the price of the rates of other countries and the highest in Asia,” he said, noting that the country’s power price is even higher than in Japan.

“So if you double the price 40 percent of course your price is high. Of course it is amazing were not the highest, if not we will be very efficient. Considering other things like efficiency, technology labor, skill, we are really at a very reasonable price,” he said.

Another factor that increases production cost is the use of imported coal. Coal cost is at least 30 percent higher than the coal produced in other countries, Ordoñez said.

To lower cement prices, the government must bring down the cost of power. Lower power cost will eventually reflect on manufacturers’ cost of production. The margin for producers is so small right now, he
said. The only way we can to stay alive is for power costs to go down, Ordoñez added.

Defending their position, manufacturers also blame the government for high product prices given the lousy infrastructure it provides manufacturers.

Consumption picks up

After a long time cement consumption being low and stagnant, Cemap sees an improvement.
Consumption, per Cemap’s records, has been totally flat for the last 10 years.

But now the infrastructure projects in the country have increased.

“It’s only this year that we would be able to match what’s done in the late 1990s,” Ordoñez said.

The Philippines has per capita cement consumption of 155kg for every person making it the lowest in Asia. Thailand has per capita consumption of 268kg for every person while Vietnam has 482kg.

There was an uptick in consumption because finally the government is putting money on building more infrastructures. Ordonez said businessmen often complain about lack of good infrastructure and eventually in the last two years the government, especially under the Arroyo administration, began pouring in money to build them.

The housing sector also began to pick up. Housing has been increasing but Ordonez noted that in housing, only 15 percent of an entire structure is made of cement.

“Housing is 10 to 15 percent cement, its a very low percent. Very small component of housing is cement but without cement you cannot have a house.” –ANGELO S. SAMONTE REPORTER, Manila Times