Dec 2008 Financial News

Cement crisis... again!

Dec 05, 2008

The local cement industry is yet another victim of the global financial crisis which has seriously impacted the Jamaican economy. According to the general manager of Caribbean Cement Company (the largest supplier of cement in Jamaica) Anthony Haynes, the sector has seen a 30 per cent decline in sales and continues to experience turbulence.

"Without getting into hyperbole, the construction sector is collapsing. If one looks at the first quarter of this year, compared to last year, sales are down 30 per cent and I'm not talking about just Carib Cement, I'm talking about the entire sector! This is, of course, anecdotal because when I talk to people in steel and lumber, they validate these figures. Over the course of this year we have seen a month-by-month steady decline," said the Carib Cement boss.

He further pointed out that total volumes are down 12 per cent compared to last year and the sector continues to contract. But by no means is this peculiar to Jamaica alone. The construction industry the world over is seeing a downturn. "I was speaking with a colleague who is a cement supplier in Florida who told me that cement production and sales are down 40 per cent there and 30 per cent in other states across America," added Haynes. Faced with rising input costs, inflation and the precarious state of the local economy, Caribbean Cement took the decision to raise the price of cement by six per cent in August of this year. This followed an earlier increase in January. During the first half of its financial year, Carib Cement recorded a net profit of $271 million, an increase on the $252 million reported last year. However, for the September quarter this year it suffered a loss of $57 million mainly due to high input costs.

Caribbean Cement has weathered a number of calamities - both natural and man-made - over the last two years, but continues to remain resilient. It has had to endure lower local demand while seeing an increased supply of cheaper cement, particularly from China and Thailand. Last year, a 29 per cent increase in prices assisted in offsetting its decline in revenues. The Government also took measures to eliminate the 40 per cent tariff on imported Portland Grey Cement thus levelling the playing field and so stemming the tide of cheap and, in many cases, substandard product flooding the market.

Over the years 2006 and 2007, there was a boom in construction, so much so that Caribbean Cement's ability to supply the market was called into question. The company announced that it would add a new kiln and would be expanding its production of cement from 900,000 tonnes a year to 1.8 million tonnes a year which would more than adequately supply the market. This exercise will come in at a cost of US$150 million a year.

"All the big construction projects began in 2006 but are now nearing completion," said Haynes. "All these projects such as work on Sabina Park, the Riu hotel have not been replaced with other sizeable projects. What exacerbates the situation in our industry is that the big projects are great but we have always enjoyed good sales with home construction, which we are not seeing now.

This can perhaps be traced back to the collapse of the unregulated financial organisations, the fall-off in remittances and the financial crunch which is gripping the country. I can tell you that the inflows from the unregulated financial organisations certainly had a positive impact on home construction and in turn the cement industry."

Importers of cement have often complained that Caribbean Cement enjoys a monopoly and is protected by the Government. When Caribbean Cement had quality and supply issues many claimed they were vindicated and that the law of supply and demand should prevail. Haynes maintains that the importers of cheap cement do the industry a disservice.

"The market is currently contracting and there is still significant imported cement here in Jamaica; however, in the last quarter these importers have seen their supplies dry up," he said. "In most cases these importers are opportunists and are very unreliable. Last year, in the same quarter when they had supply issues which caused a ripple in the market, we were able to supply all of Jamaica with 225,000 tonnes in sales.

"I predict for this current quarter - that is in 2008 - we will see a market of 185,000 tonnes, which is 40,000 tonnes down on the same quarter last year. Back in 2006 when we had a severe crisis, particularly in the months of March, April and May, the market took 189,000 tonnes. Now you see we are selling less cement than we did during that unfortunate period which caused a lot of grief and strife. Also, the market is taking in 25 per cent less than in the last quarter when Carib Cement supplied the entire market."

In 2004 the Government imposed a 90 per cent duty on imported cement because it deemed dumped cement as unfairly traded. Haynes notes that at this time when the market is contracting, anti-dumping legislation is not being enforced, allowing cheap dumped cement to proliferate. This he sees as being very unfair and should be addressed expeditiously. He points out that if one should raise pricing issues, then Caribbean Cement has always honoured its commitment to keep prices at a certain level and it did so when it was experiencing difficulties.

"What we have found is that every time we have corrected prices the importers have followed us, so the consumer never really gains. Also, the question has to be asked, why is the Government forgoing millions of US dollars in duties from these importers at a time when it is in desperate need of revenues?" Although he concedes that the global financial crisis has its part to play, Haynes is of the view that the crisis is of itself a failure of globalisation.

"This crisis is not about toxic assets and people defaulting on their loans and mortgages," he argued. "It's about greed, corruption and an absence of regulation. What we continue to see is developing nations seduced by cheap goods to the detriment of national development. Very often these developing countries support regimes that are suppressive and indulge in child labour.

"Then you have manufacturers coming under pressure from trade unions, or environmental groups. Their solution is to shut down the plant and set up in so-called "friendly countries" where they can turn a blind eye to environmental and labour concerns. As you can see, we are now reaping what we have sown. All this financial witchcraft has led to failed policies, which we still continue to pursue. Albert Einstein once said, 'You can't solve a problem with the same level of thinking that got you into the problem'. The solution to everything is not the free market and globalisation. There must be boundaries and regulations. You must have a conscience and ask yourself what cost are you willing to pay for development."

Carib Cement continues to engage in dialogue with the Government and put forward its position. Haynes went on to say that the country's leading cement supplier has found it extremely frustrating that government policy-makers have not been exactly accommodating. The company has met with other stakeholders, more notably the Ministry of Labour, not to announce possible lay-offs but to point out that over the last quarter the market has dried up and that there is now a serious risk to the industry. The aim, Haynes says, is to stabilise the industry then get it out of the quagmire and into growth.


Source:
Al Edwards
The Jamaica Observer
Friday December 5, 2008
http://www.jamaicaobserver.com/magazines/Business/html/20081204T1900000500_143334_OBS__B_CEMENT_CRISIS____AGAIN___B_.asp