Philippine cement industry: say it ain't so, Peter!

WE support Trade and Industry Secretary Peter Favila’s efforts to get to the bottom of the supposed spikes in cement prices. We are entering the summer months, the start of the construction season, and we can’t afford to unduly penalize the construction sector that is just starting to recover since the Asian financial crisis in 1997.

If there’s one sector that can really make a difference in the lives of many ordinary people in the quickest time possible, it’s the construction industry. It’s a labor-intensive industry that soaks up lots of jobless brawn off the streets as soon as people decide to build buildings, industrial plants and homes.

Taking off from Favila’s lament, it’s indeed curious that a 40-kg bag of cement now reportedly costs P200, when sales are supposedly low. That seems to violate the basic concept of the law of supply and demand. He threatened to import cement should the spikes continue, if only to protect consumers. It’s a sensible policy we say, given that there is now a pressing need to bring down to the masses the benefits of modest growth that we have achieved in recent years.

But why should the government resort to such action? We have checked with the Tariff Commission and we have found out that the government has removed the special safeguards measures (SSM) that former trade secretary Mar Roxas had applied on cement imports long ago.

In 2001, Roxas caved in to the local cement lobby that was then complaining about “injuries” caused by rising cement imports and was forced to impose SSM, thus significantly raising cement prices in the local market. In response, the Tariff Commission conducted an investigation and found out that Roxas’s decision was totally baseless, as local manufacturers maintained an 80-percent share of the domestic market. The report also stated that there was no injury to speak of, nor was there any worker losing his job because of the rise of cement imports. The industry, in fact, improved its productivity as a result of the rising foreign competition.

Thus, right now cement enjoys a low tariff of 5 percent. Given that anybody could actually import the stuff now without any other trade barrier, it’s probably unnecessary for the government to threaten local cement producers with imports.

Is Favila grandstanding? We are asking this question because, given the low tariff rates for cement (5 percent), it’s possible that the recent rise in domestic prices is the result of market forces. In the last four quarters, the gross value added of the construction sector has been growing within the range of 3.5 percent to 5.2 percent.

Lately, analysts have been saying that the property sector is due for a boom in response to certain structural factors like rising remittances, rising investment inflows, and the continuing demand for office spaces by the business-process outsourcing industry. Certainly, under a competitive environment, an increase in local prices could immediately trigger either rising production or imports, as suppliers try their best to capture the windfall gains. In just a short while, prices will stabilize again to the benefit of consumers.

So why worry? Why the threat of flooding the local market with cement imports?

Unless Favila knows something that we don’t.

The only way local cement prices could rise above what the market would allow is when producers, as well as importers, collude to take advantage of the coming construction boom. Certainly, a lot of cement-industry stakeholders are salivating at the prospect of making easy money from the projected 20-percent property growth in 2007. But is collusion possible considering that there are many producers and suppliers?

Consider this report from the Tariff Commission: “After 1997, faced with a shrinking market and financial problems, the local companies were ripe for the picking. They were looking for investors or partners as their ‘knights in shining armor’ to save them from their financial woes. The attractiveness of the local cement companies was something that the international players could not ignore.

“Given the cement companies’ dire straits and given the fact that the peso had depreciated considerably vis-à-vis the dollar, given that new plants were now being put up or going on stream, given the foreign cement companies’ experience in other countries of achieving market dominance, and given the openness of the local owners to foreign investments, the time had come for the global companies to enter the Philippine market in a big way. The local companies could be had at bargain, if not basement, prices. Between 1997 and 1999, Blue Circle, Cemex, Holcim and Lafarge took over 12 companies which now control 89 percent of total industry capacity.”

There you go! What we have here is a concentrated industry where a few companies control the bulk of the local market. There are importers of course, but they actually just account for 13 percent of the domestic market. And in the context of the Philippine political economy where every big shot is a relative, kumpare or a fraternity brother of the niece or the balae of the other, collusion might be one issue here.

We actually hope there is no such collusion; nor do we assume such malevolence. But what we stress here is that indeed Peter Favila, a guardian of public interest when it comes to trade and consumer affairs, has a serious job to do here. And do he must in the most transparent of ways. If he sees collusion somewhere down the road of inquiry, he must let the public know.

To quote Ralph Waldo Emerson (1803-1882): “Each man takes care that his neighbor shall not cheat him. But a day comes when he begins to care that he does not cheat his neighbor. Then all goes well—he has changed his market-cart into a chariot of the sun.”

Yes, we need the powers of the state to help make sure some guys out there who do business would indeed change their market carts into chariots of the sun.