HIKE IN CEMENT PRICES

Curtailing exports is not a prudent decision

By SHABBIR H. KAZMI
July 04 - 10, 2005

Generally the cement manufacturers are alleged to have established a cartel in the country and increasing the prices off and on and that too without any economic justification. However, it is also important to find out reasons for the recent hike in cement prices. It may be true that cement demand is surpassing production, which provides an opportunity to unscrupulous elements to exploit the situation. It is also true that the rise in fuel cost is also a major factor responsible for the rising prices. The government does not like the situation and wants the manufacturers to bring down price of cement by improving supply, even at the cost of curtailing exports.

According to the latest reports, a 15-member delegation of All Pakistan Cement Manufacturers Association (APCMA), led by its Chairman, met the Minister for Industries and Production, Jehangir Khan Tarin and promised him to bring down the price of cement from Rs 295 to Rs275 per bag within next 15 days. Both the sides agreed to meet again after two weeks to review the prices of cement and make sure that the prices have gone down significantly. The government has been regularly monitoring the prices of cement, ever since the budget for 2005-06 was announced. The cement manufacturers further assured the minister that the price of cement, which had surged to Rs 320 per bag few days ago, would eventually be brought down, preferably to Rs 271 per bag, very soon.

Reportedly, the minister adopted a tough tone and told the cement manufacturers that if they failed to cut down the prices, the government would not only impose a regulatory duty on it but would also facilitate its import. He also said that the government could exercise various options in case the prices were not immediately brought down. Higher prices are not only hurting the people but were also causing further increase in inflation. The manufacturers told the minister that daily supplies of cement were being improved to ensure a balance in demand and supply that would ensure price stabilization in the market. About 45,000 to 50,000 tons of cement per day was being supplied by the manufacturers to improve the supply. The minister was of the view that unless the local demand was met adequately, cement should not be exported to any country. He said the government wanted to help the Afghan government in every possible way, including by supporting the construction activities in Afghanistan. However, the manufacturers should first try to cater to the requirements and then think about exporting the product to any country.

Alfalah Securities rules out the possibility of cement import to mitigate the temporary supply gap prevailing in the country due to (1) normalization of cement supplies (2) implied insufficiency of supply availability in the regional countries. It expect cement supply addition of 17,315 tons per day over the next twelve months taking the total installed supply to 79,314 tons per day as compared to expected cement consumption of 64,030 tons per day. It believes that the ongoing tight supply situation has been caused by (1) temporary shut down of plants for maintenance and expansion and (2) increase in local and export demand. It does not see current price levels as unsustainable.

The government is considering the imports of cement to bridge the demand and supply gap. There seems no possibility of cement imports into the country over the next two to three months to fill the gap. The commodity imports at government level takes on average 2-3 months in completing the process from getting approval from cabinet to the final floatation of tenders and physical imports. However, situation is expected to normalize due to confluence of three factors. These are: 1) end of seasonal spike in cement consumption due to upcoming rainy season and slow down in release of funds, 2) resumption of operations by plants shut down for maintenance and 3) increase in capacity by 4.95 million tons through expansion. This normalization in supply is expected to help in easing off the price hike at retail level.

REGIONAL SUPPLY SITUATION

The cement players hint at lower possibility of availability of surplus cement capacities in big cement manufacturing countries like China, India and Iran. The local cement players have been receiving the supply tenders for the exports of cement from non-conventional importing courtiers like Sri Lanka, UAE and Iraq despite having an 8 to 10 percent price disadvantage over other regional players. This indicates ongoing tight regional supply situation. Markets in Sri Lanka and UAE have been served by India and Iran over the years.

The prevailing situation of cement industry hints towards two of the policy weakness, government trying to find a short cut and following myopic strategy. For a considerably long time local manufacturer have been trying to export cement. A sudden and abrupt discontinuation of export, particularly at a time there is a global short supply, could push Pakistan out of cement export business. There were attempts by Monopoly Control Authority to show that the cartel was responsible for the hike in cement prices. Having failed in putting up any substantial argument against cement manufacturers, the government now seems ready to follow 'pressure tactics', which will neither be good for the sector nor for the country.

SUPPLY ADDITIONS
(Tons per day)

MANUFACTURER

ADDITION

Bestway

945

Cherat

840

Maple

735

Pioneer

588

Lucky

8,820

Saadi

2,100

Zaman

3,308

Source: Alfalah Securities