Balancing act for cement industry

The surge in infrastructure building under the government’s ambitious P8-trillion Build Build Build (BBB) program has spawned a dilemma for cement industry stakeholders and the Department of Trade and Industry (DTI) — and this may well spread to other sectors that will be affected.

On one hand are cement manufacturers operating in the country that have had the foresight to ramp up their investments in the last two years in anticipation of the construction surge from the government’s BBB promise. On the other hand, we have the importers who are having a field day with the recent extraordinary jump in demand for cement, and who are benefiting from robust bottom lines without investing on machineries, equipment, and other solid assets.

Cement importers, however, have somehow served to balance domestic prices of this all-important construction ingredient amidst the financial difficulties encountered by some cement manufacturers starting in 2014 with the influx of cheap imported cement. Still, as manufacturers would point out, their problems have been compounded by unbridled imports as traders’ volumes grew by 70 percent in 2014, 4,391 percent in 2015, 549 percent in 2016, and 72 percent in 2017. From a market share of only 0.02 percent in 2013, importers now account for 15 percent.

Making a case

Manufacturers argue that they deserve government support inasmuch as they are investing billions of pesos in plants, often with state-of-the-art technologies to bring down production cost and mitigate any adverse environment impact.

Cement companies also point out that a healthy local cement manufacturing industry would be able to generate jobs in the country, with the Cement Manufacturers’ Association of the Philippines (CEMAP) citing 110,000 jobs in the short- to medium-term, and up to 400,000 directly and indirectly by 2030.

But more than all the above-mentioned benefits, cement companies are simply protecting their investments in an industry that carries high risks as well as the need to reinvest huge capital to keep up with new technologies and increasingly stringent environmental standards.

CEMAP, which carries the voice and interest of the top four cement manufacturers in the country that account for about 82 percent of domestic production, announced that the industry has already taken steps to beef up its current capacity by more than 50 percent of its current 29-million-tons production volume.

This would be enough to cover for the estimated 12 percent growth in annual demand, which the DTI concurred — and supported by way of fiscal and non-fiscal incentives for the cement industry under the 2017 Investment Priorities Plan.

Safeguard

Aside from the industry’s inclusion in the 2017 IPP, DTI also ruled for an additional four percent (equivalent to P8.40) duty per bag of imported cement as an emergency safeguard measure to protect the local manufacturing companies from increased importation.

The extra tariff, which is expected to take effect this week, is possible under the Safeguard Measures Act of 2000 where the DTI secretary may call for additional taxes on the importation of non-agricultural products, if there is reason to believe that the local industry will be harmed.

Amidst the flurry of protests that the move would make cement more expensive, create a shortage of cement in the market, and even undermine social housing projects that are sensitive to the cost of building materials, the DTI clarified that the safeguards would be temporary, for 200 days, or until an ongoing investigation on the matter is completed.

The DTI assured critics that the law has provisions to guard against unreasonable price increases. Likewise, given the current capacity of existing local cement manufacturers, a feared shortage is highly unlikely, plus the added revenues collected from the higher import tax would do well to support the government’s infrastructure program.

Even in 2016 when the government was already preparing for the launch of BBB, the DTI was already partial to protecting the cement industry, as well as other manufacturing sectors that would be needed to support the heightened spending for infrastructure projects.

Watching out

Definitely, with close to P9 trillion needed to fast track at least 33 flagship projects until 2022, it would be better to have a strong cement manufacturing industry that would benefit the Philippines through new jobs and investments rather than other countries.

How the safeguards will ultimately pan out for consumers, industry, the government’s BBB program, and gross domestic growth will bear watching. Any abnormal surge in cement prices from shortages will not sit well with a country that has just gotten through high food prices last year.

Smuggling has also to be closely monitored, especially now that there is surplus production in China, Vietnam, Indonesia, and Thailand, and demand for cement in other parts of the world including the US, Europe, and the Middle East is slow.

Getting there

Finally, we’re seeing more and more of the flagship projects breaking ground, as well as new mega-projects proposed by the private sector being seriously considered by government planners.

While the number of projects is still way below the target, the government is proud about having spent close to 6.2 percent of the gross domestic product on infrastructure last year, almost triple the two percent average spent in previous years from 1986 and 2016.

This year will see more projects taken off the planning board as kinks in official development assistance, the government’s preferred route for infrastructure funding, are ironed out. With the expansion projects of cement companies completed this year and in 2020, the additional production capacity comes just in time.

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