CEMENT INDUSTRY'S RESPONSE

The Philippine Star
01/21/08

In previous columns, we raised several issues with regards the cement industry, particularly its prices and the continuing protection that it receives from government specifically on tariff.

Subsequently, Ernie Ordonez, president of the Cement Manufacturing Association of the Philippines, requested for a meeting on behalf of the cement companies in the country to air their side.

I am featuring in today's column pertinent parts of the briefing that took place. The industry outlined its basic problems more so with regards its current price levels, justifying the continued need for tariff protection.

According to Ordonez, the Philippine cement market is presently supplied by seven cement manufacturers and three importers, thus sufficing for a credible competitive environment in the industry today.

The local cement industry has 18 integrated plants with total kiln (operating) capacity of 18.5 million tons of clinker and 26 million tons of cement, he said. The domestic demand for the past five years has been at an average of 12 million tons per year, so there is no shortage in terms of cement supply capability.

In the years that multinational cement companies had entered the industry, they had infused more than P100 billion to make the Philippine cement industry globally competitive, adds Ordonez. These firms brought in the best equipment, technology, and management systems to conform to the global standards they have implemented worldwide.

In the environment area, since the multinational companies are required to follow their global environment requirements, which are more demanding and stringent than the Philippine national legal standards, the cement industry has become a model for environmentally responsive technology, winning both national and international awards, claims Ordonez.

Below inflation rate

Cement prices have increased by a compounded annual growth rate of 3.7 percent during the past 10 years, below the 5.8 percent inflation rate, says Ordonez.

The cement price increase is also way below the increases in energy cost, which constitute 40 percent of production cost. NSO records on the average wholesale prices of construction materials from December 2000 to December 2006 show that compounded annual growth of cement prices during the period was 6.3 percent.

This is much lower than the compounded annual growth rate (CAGR) of other construction materials such as asphalt (11.1 percent), clear glass (12 percent), reinforcing steel (17.3 percent), and structural steel (10.6 percent).

Higher prices at retail level

Contrary to misleading reports, Ordonez stresses that cement prices in the Philippines are in the higher mid-range but not the highest in Asia. Price per metric ton of cement, delivered to retailers before sales tax for the 3^rd quarter of 2007 is $79. This is lower than Japan's $160 and lower than India's P132 and Brunei's $93.

Ordonez admits, however, that these price comparisons may not be true at retail level as retailers may jack up prices depending on supply situation at their respective localities. Unfortunately, the much higher retail prices are what the consumers see and feel.

Blaming electricity costs

Compared to other ASEAN countries, the Philippines has higher cement prices because of the more expensive power in the country, which is 25 percent of production cost. Power cost in the Philippines is $0.11 per kilowatthour, almost double the $0.06/kwh power cost of other ASEAN countries.

Electricity cost in the Philippines is among the highest in the world. Since electricity is a large component of cement production cost, cement prices will understandably reflect the differences in each country's power cost. Philippine cement input costs have also increased faster than cement prices.

Unsustainable price levels

Ordonez recalled that in 2002 and 2003, a price war occurred in the industry. The low Portland retail price that was reached during these years of P85 per 40-kg bag is sometimes cited to show the large increase of cement prices since the multinational companies took over.

Ordonez emphasized, however, that the 2002 and 2003 prices are not typical and not sustainable. A Reuters report downloaded from the Internet listed the performance of two publicly listed cement companies during this period. One company showed losses of P5.2 billion and P552 million in 2002 and 2003 respectively before tax. Another company showed losses of P383 million in 2002 and P581 million in 2003. The whole cement industry losses amounted to at least P9 billion.

Latest published information for these two listed cement companies showed improvements with sales at more profitable levels but a return on equity still below cost of capital. The 2005 ROE for the first firm was 9 percent, and 7.4 percent for the second firm.

Small component only

Cement is a small component of construction costs. For example, a 3.7 percent increase in cement means only a 0.7 percent increase for national roads, a 0.3 percent increase for bridges and 0.4 percent increase in residential housing.

In conclusion, Ordonez states that the outlook for cement is now brighter as a result of growth in cement demand after a period of stagnancy for the last five years. And at an optimistic assumption of 7 percent increase in cement demand, the 56 percent capacity utilization of the local industry will be adequately addressed.

Is there cartel in the industry?

Pressed on this question, Ordonez admits that the industry has to look at ways to correct this perception. This is similar to the allegations made against the oil companies during the early days of deregulation and up to the present. Graphs and statistical presentations are good for show but the ultimate test is what the public sees at the market place.

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