Disaster looms for cement industry?

I had the privilege of interviewing Mr. Ernesto Ordoñez a few years back when he was still with the government sector.  Now that he is in the private sector, as president of the Cement Manufacturers Association of the Philippines (CEMAP), we have him back on the show Business & Leisure where he shared some very enlightening info on the local cement industry.

The latest controversy rocking the cement industry is the proposed move to bring down the tariff on imported cement, now at an incredibly low five percent to zero percent, the rationale being one that leans towards the consumers. Meaning, whatever savings can be realized on the end goods will mean savings for the consumer.

The interview started off with a very vehement statement from Mr. Ordoñez: “The Cement Manufacturers is solid in saying that bringing down the five-percent tax to zero percent is counter-productive to building infrastructure development in the country. The reason is, if you bring it down from five percent to zero, you will allow the imports to come in cheaply.... The cement companies which are already getting very low returns will lose market share, thus bringing their share even further down. When that happens, they will lose their capacity to expand. When they lose their capacity to expand-what will happen next is we will depend more and more on imports.... The problem is, in a strategic industry such as this, when you rely on imports... you don’t have the certainty of supply that can go up and down.... Infrastructure can’t proceed properly if you cannot forecast supply availability. Prices can go up because when you need something badly and the rest of the world needs it more, your prices will skyrocket, as has happened before.”

As far as quality is concerned, Ernie put it very simply.  We can only get the worst quality because “you will only get what is not desired in their country.” Meaning, we either only get their surplus, or get dumped with what they can’t or won’t use.

How do our cement prices compare to those of our neighboring countries? Very competitive, according to CEMAP. Apparently, our prices are significantly cheaper than Brunei, Japan and India, by as much as 20 percent. We are however, higher than some other Asian countries like Indonesia for example.

Let us take the example of Indonesia where Mr. Ordoñez points out that coal is cheaper by as much as 50 percent than what we get it for. If we consider the energy factors like coal and electricity which has actually doubled for the consumers, our cement products should be shockingly much more expensive than Indonesia’s. But the figures cited by the cement producers show that our local cement is only four percent higher than Indonesia’s, while still maintaining prices much lower than Brunei, Japan and India. The energy production cost component dictates an increase of at least 24 percent, but they have kept this down to just four percent. They must, indeed, be doing well in the other factors involved here.

What is also interesting is that Malaysia, which has enviable and amazing infrastructure growth in recent years, has kept its tariff on imported cement at an amazing 50 percent.  Malaysia has always prided itself in prioritizing its infrastructure development which has placed the country ahead in business and tourism development. Vietnam, which has seen ravage comparable only to the devastation of World War II, has also seen the wisdom of putting infrastructure ahead of all their other plans of rehabilitation. This country, which was leaps and bounds behind us until just recently, keeps its tariff on imported cement at 40 percent. No wonder Mr. Ordonez points out that “anywhere at five percent is already an anomaly. To bring it down to zero percent is already contradictory to the idea of good industry policy especially for a strategic industry like cement.”

He drives in the nail further: “If cement imports come in, and they are not in significant amounts, traders will get all the profits. Why will they sell it low when demand is there and they can bring it up to the regular market price? This can only mean that the consumers are not the direct beneficiaries of the projected move — only the traders.” He adds that “if it is already a flood, then they will be fighting each other, and temporarily, only temporarily, the consumer might have the advantage. But as you kill the local industry, you will depend more and more on imports and once that happens, you will be at the mercy of the exporting countries. They can change prices anytime, and you have no choice. In the long run, it will mean higher costs.”

As it is right now, our cement factories are only operating at 60-percent capacity, so the cement producers are confident that, should the demand become stronger in the next few years, there is no cause to worry. There are smaller plants that are just waiting in the wings to get started up, depending on demand. The infrastructure is there, but to operate now when the demand is not yet there would be futile.

As to the claims that there is a cartel in the industry, Mr. Ordoñez says that if this were true, prices would have been manipulated and this can be plotted easily. Ten years ago, cement was at P134/bag. At a negligible P5/bag increase per year, cement should at least be at P184/bag.  It now stands at P179. While it is true that, at one point, cement was selling at P100/bag, Mr. Ordoñez said that this was when the government was unable to do something about the dumping of cheap imported cement which he called technical smuggling.  Since then, the issue has been addressed, after the industry suffered losses of about P10 billion, and the market prices have adjusted.

Infrastructure is really what the country needs at this time, especially now that the economy is picking up.  Cement is an important component of infrastructure, and it accounts for 10-to12-percent of infra cost.  Indeed, if we really rely on imported cement, we would be killing the local industry, and that would mean more unemployment.  If we patronize and keep imported cement alive, we would be giving more jobs to those foreign companies whose business we patronize while kicking out our own countrymen from their jobs.  This does not sit very well with our own idea of protecting our own.

Mabuhay!!!  Be proud to be a Filipino.

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