Cracks in cement

CEMENT, a product slapped with maximum retail price, is in crisis. During the past few weeks cement has been the centre of much public spotlight and debate.

Macho-type talk by  Co-operatives and Internal Trade Minister Johnston Fernando and his lack of consultation with cement trade hasn’t helped the situation either.

Let’s take stock of the situation. Given post-war rebound as well as massive Government-led infrastructure development the overall construction sector has been active though some sections are certain to complain that many commercial projects remain stalled.

In the first quarter the construction sector’s GDP had grown by 14.3% in comparison to 8.5% in the corresponding period of last year. The Census and Statistics Department also said the total cement production increased from 903,711 mt. to 1,070,945 mt. indicating an 18.5% increase year on year. The imported building materials quantity index increased from 178.6 Q1 2010 to 191.6 Q1 2011 indicating a 7.3% increase.

As per Central Bank data, local cement production in the first five months had increased by 17% to 803,000 tonnes. Imports had increased by 18.3% to 897,000 tonnes. The combined effect is that total cement market had increased by 17.6% to 1.7 million tonnes.

These high numbers are on the back of a rebound in 2010 in the construction industry and cement sub sectors.  In 2010 the construction sector expanded significantly by 9.3% in value added terms in 2010 compared to a lower growth of 5.6% in 2009. Cement availability grew by 18% in 2010 compared to a contraction of 11% in the previous year. Minister Fernando may not have updated himself with statistics but in short the cement industry has been in full force. Given the rise in usage the two local manufacturers Holcim and Tokyo who could together supply 60% of the demand are said to be operating at near 100% capacity.

The crisis appears on the import side and largely on account of demand elsewhere especially in major producer countries and their major export markets.

Minister Fernando has been quite vocal that the industry is creating a shortage to hike prices. Cement’s maximum retail price is Rs. 750 per bag. The price used to be Rs. 785 last year but was reduced sans consultation with the industry. Be that as it may, Minister Fernando rather than rushing to allege that there is no global shortage of cement he simply has only to check shipments data of some of the leading importers such as Lafarge, Ultra Tech and ICL. The market also has two state owned importers Lanka Cement and Co-operative with the former not being highly active. In the financial year ended 31 December, 2010, Lanka Cement turnover had been only Rs. 222 million, down from Rs. 579 million in 2009 whilst losses rose to Rs. 32 million as opposed to Rs. 11 million. In the first quarter of 2011 turnover of Lanka Cement was almost static at Rs. 55.8 million. It has been reported that Lanka Cement is awaiting a shipment of 200,000 bags with plans to sell at less than Rs. 700 per bag.

The crisis was given a new twist with Co-op importing and selling cement sans official granting of SLS mark by the Sri Lanka Standards Institution. The two state sector organisations took their ugly fight to the public reaffirming yet again there is lack of dialogue and transparency. Minister Fernando’s outcry was that the brand of cement imported by Co-op from Pakistan being rejected whereas previous shipments from private sector of the same brand been cleared. Though Fernando had reportedly castigated Tokyo for selling cement in bags marked with previous high price (an allegation the Company had denied but it was only selling at the lower prices though in previously printed bags to meet the growing demand), electronic media footage showed even Co-op bags price marked at Rs. 785.

The applicability of minimum retail price across the country is also not practical. Transport of a cement bag priced at Rs. 750 from Colombo to for example Jaffna will cost the trader/importer Rs. 125 per bag. Hence across the country prices vary.

For years the local cement industry has been urging for a national policy and greater support to boost value addition and capacity. Given the presence of multinational brands the politicians and industry has been playing football over the issue as well. The current crisis is a late wakeup call for the Government to take serious stock of the cement industry and urgently have a frank dialogue with the industry and in unison take corrective measures. Failure will only lead to cracks in Government’s zeal to deliver rapid socio-economic growth in the post-war era for which construction and cement are critical.