In a meeting on Tuesday, Finance Minister Shaukat Tareen urged cement manufacturers to sell the commodity at more affordable prices. The prices should be reduced, he pressed on, underlying the stimulus measures the government has taken to boost demand in the sector.
The context? Average cement prices are on the rise and stand the highest they have ever been; in consonance with demand, which is also the highest it has ever been. Domestic dispatches have rivalled and surpassed their historic peak offtake during FY18 (4.6 million tons during Mar-18). Thrice during FY21, the industry crossed the new monthly benchmark of 5 million tons for domestic dispatches. As a result, prices have not stopped short. And builders have not stopped complaining.
To review: after plummeting during FY20 leading up to covid-related lockdowns, cement prices have continued to rebound slowly since Nov-20 and quite dramatically since Jun-21 which has been a marked turning point. Average spot price on Aug-12 for instance, went up by Rs21 per bag compared to Jul-15—in just one month. Between Nov-20 till now, prices have gone up Rs 106 per bag, according to data collected by the Pakistan Bureau of Statistics (PBS).
Meanwhile, domestic cement offtake was 20 percent more in the outgoing fiscal year compared to FY20, and by no measure was FY20 a bad year for the industry from the demand perspective. For the upcoming year, the government has announced nearly a 40 percent increase in development budget which include infrastructure projects and several development plans including Karachi Transformation Plan that would feed demand into construction industry and by relation, into cement, steel and other construction materials manufacturers. Meanwhile, four major dams (and a few smaller ones) are under construction. There is also a mark-up subsidy for new home owners to the tune of Rs30 billion under Naya Pakistan Housing Plan (NPHP)
The fact that prices are now persistently surging for big-ticket items such as cement and steel that make up a good portion of the cost of grey construction should give the government and developers pause. What about low-cost housing now, they would ask?
The truth is, most of the projects that have been announced specifically under NPHP are being developed by provincial and city development authorities in Punjab and Sindh with Naya Pakistan Housing and Development Authority (NPHDA). It seems—and as expected—private developers are focusing on the not-so low-cost housing and enjoying the many benefits under the government’s amnesty package for investment in construction.
And if developers are not making affordable housing, why should cement and steel manufacturers be pushed to reduce prices by the government? As for public-sector schemes, when it comes to creating affordable housing, the rising cost of construction was always a concern, one that has been frequently highlighted in this space.
But at the same time, the government should not intervene. It could however, open the economy to imports of cement and steel bars (by lowering tariffs) to take away some of the pricing power these manufacturers currently possess and give them some healthy competition. Having said that, it is not easy to import these dirty commodities and the government would have to create robust quality and safety standards for the incoming imports which would require work. Not much else should be done.
Conversely, the government could cut down FED and reduce sales tax on these goods—like it did so generously for the automobile industry—and wait for prices to come down. But that will have a momentary effect, until prices are raised again due to rising costs. This is a band-aid approach.
The fact is, cement prices very evidently follow demand and industry capacity. When demand is low and cement companies are underutilizing capacity, they stop colluding and prices drop. When demand strengthens, they get back their pricing power and raise prices in unison. It is an industry that works, even if opening up imports could throw a wrench in their current pricing models. Right now, global coal prices have been out-of-control which does not make a case for reduction in cement retention here at home (read more: “Cement prices re-emerge”, July 27, 2021).
If the government worries that the price increases are unfair and anti-competitive, that is a subject for the CCP (read more: “Cement cartel: No cloak and dagger”, Dec 17, 2020) to take up. Yes, the government is feeding a lot of demand into cement (and other construction materials) but that does not mean it should dictate or influence pricing. It could nudge, and perhaps, that is what the FM is doing. Maybe unsuccessfully?
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