Rising construction cost to further aggravate housing units' shortage

Feb 19 - 25, 2007

By the time you read these lines the week-long voluntary stoppage of cement buying by the Association of Builders and Developers (ABAD) and All Pakistan Contractors Association (APCA) would still be continuing. The move by the top two cement users is aimed at forcing the cement manufacturers slash the prices of the most basic construction material that started rising just about two weeks ago with the end of winter during which construction activities traditionally slow down each year.

The decision to stop buying cement voluntary by ABAD and APCA during February 15-22 was announced jointly by the leaders of the two associations, as the week-long voluntary stoppage of buying cement will be in progress. It is meant to be a protest against the sudden and sharp rise in cement prices early this month from around Rs 170 per 50 kilo bag in the northern region of the country and around Rs 200-210 per bag in the southern region. It is usual for cement prices to be comparatively lower in the off-peak northern region where winter is more severe than south.

The government took notice of the rising prices and the Minister for Industries and Production Jehangir Khan Tareen held a meeting with the representatives of All Pakistan Cement Manufacturers Association. The outcome of the meeting came in the government's decision to fix the price at Rs 260 per bag with Mr. Tareen saying that it would help arrest the increase in cement prices. He also said that the government would ensure that retail cement prices should not cross the Rs 260 barrier. However, there are reports that a bag of cement is selling in many parts of the country at Rs 270.

Would the joint voluntary boycott nationwide by the two biggest cement users bring down cement prices? We will have to wait and see though the Chairman of All Pakistan Cement Manufacturers Association Aizaz Shaikh has ruled out that it would make any dent on the financial health of manufacturers. "Cement price will not exceed Rs 260 anywhere in the country and that's a very good price." And yes, cement prices have already exceeded in many places across the country.

As the representatives of ABAD and APCA representatives were briefing journalists about the boycott the Pakistan Steel Mill was announcing increase in the prices of pig iron and billet by Rs 1,000 to Rs 27,255 and Rs 1,800 to Rs 35,300 per ton, respectively. The PS attributed the latest increase to the hike in raw material prices in the international market. The price of mild steel bar, a basic input of the construction industry, shot up by Rs 1,000 per ton to Rs 42,000 per ton.

The substantial increase in the prices of cement and steel, the two basic construction materials, would further push the already unaffordable house construction costs to new high and worsening the already severe housing situation in the country.

During the second half of 2003 the 50 kilo bag of cement was selling around Rs 130. In the 2003-04 budget, the government reduced the central excise duty by 25 per cent but cement prices registered a substantial increase of 35 per cent from Rs 160 to Rs 220 in the second half of 2003. In March 2004 the prices increased to Rs 240 level. And since then the price of the most primary construction material has been on the move except for brief periods in winter season.

As is, the time-tested economic theories seem to have lost all relevance in Pakistan - and if there were any to start with in the first place - simply because it is an economy that has peculiar realities of its own. One such theory that seemed to have been dead since long is the very basic supply and demand theory that dictates that prices are inversely proportional to demand and supply i.e prices decrease when supply exceeds demand and increase when demand surpasses supply. It also says that the bigger the gap between supply and demand the higher would be the price.

Let us focus on the peculiar ground realities mentioned above. Just last month, the sugar producers held 'negotiations' with the government to successfully convince it to fix the ex-factory price of the commodity at Rs 31 per kilo. Both the government and the influential sugar lobby made the decision look good because they said it amicably resolved the matter to the satisfaction of 'all the stakeholders'. As usual with all such exercises, consumers were neither invited nor taken in to confidence about the decision despite the fact that they have to keep paying the high retail price of the commodity.

Taking a cue from the sugar lobby the cement lobby once again sneakily pushed the price of 50 kilo bag of cement by over 30 per cent to Rs 275-280 by June. As per the game plan, the price of 50 kilo bag of cement has already registered an increase of Rs 15-20.

And this is where the demand-supply theory proves absolutely wrong in the context of Pakistan. As is, the ongoing capacity expansion in the cement sector has already pushed the supply to over 29 million tons early this year from 21 million tons in January 2005. This means that supply exceeds demand by huge 8 million tons.

In addition, there has also been a substantial decline in the cement exports primarily due to the presence of cheaper imports from other countries in the region, Iran and China in particular. The situation is feared to get worse with the capacity expansion in Iran, a major competitor.

So while the cement sector suffers from excess capacity with local demand reaming the same and exports coming to a trickle, the manufacturers have resorted to unethical practices to push the prices making the very basic demand and supply theory absolutely irrelevant to Pakistan.

With the cost of real estate already touching record high and the recent surge in the prices of construction inputs (cement and iron), the salaried class that constitutes majority population in the country could only dream of owning a house in Pakistan. The housing backlog in the country has already registered a 14-fold increase i.e. 61.9 million units from just 4.27 million units in 1998. And the increasing migration from rural areas to urban centres is already putting extreme pressure on the housing sector.