Ms. Aldaba is Senior Research Fellow at the Philippine Institute for Development Studies, a government economic think tank attached to the National Economic and Development Authority. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, August 6, 2007 edition, page S1/5.
The existence of an alleged cartel has been a persistent question in the Philippine cement industry. Recently, it was announced that cement tariffs would be eliminated. This brings us to the following questions: Will the removal of tariffs reduce prices and stimulate competition in the cement industry? Are imports effective in disciplining domestic cement firms and reducing their market power?
Historically, the Philippine cement industry thrived under a government-sanctioned cartel. Due to the economic slump in the early 1970s, cement firms pushed for government regulation to prevent cut-throat competition. The government allocated supply, controlled prices and regulated entry in the industry. However, in the absence of the necessary firm-level information to efficiently perform these tasks, the government delegated the setting of production quotas to the industry association, Philcemcor. According to M. Lamberte, E. de Dios, A. Flores, J. Tabada and E. Ramiro (“Barriers to Entry Study,” 1992), collusion in the industry took place through the firms’ informal agreement to set production quotas and to assign geographic markets among themselves. This practice divided the country into regional markets served by a dominant player, which eliminated competition from taking place.
As the government pursued market-oriented reforms in the 1980s, the industry was deregulated and liberalized. In the early 1990s, the cement companies invested in capacity expansion; however, they encountered serious financial difficulties because of the 1997-98 Asian financial crisis. Foreign companies came in and bought into the industry through mergers and acquisitions. The industry which used to be dominated by Phinma and several family-owned firms is now controlled by the world’s Big Three cement companies: Holcim, Lafarge, and Cemex.
Prior to 1997, price movements in the industry were fairly stable with prices generally rising during the dry season and falling during the rainy months. With the 1997-98 crisis, prices dropped from P104 per bag in March 1997 to P45 per bag in December 1998; but starting in January 1999, prices began to rise.
The price increases in 1999 coincided with the completion of most mergers and consolidations in the industry. Prices went up from P45 in December 1998 to P70 in February 1999, rising to P97 by December 1999. In May 2000, ex plant price/bag was already P109, reaching P132 per bag in May 2001. Considering that the industry was facing oversupply and low demand, price coordination was seen as the only explanation for the price increases. Note also that during this period of rising prices, there was excess capacity in the world market; imports were coming in and sold at prices lower than those charged by domestic manufacturers.
The domestic cement industry strongly resisted the entry of imports; Philcemcor filed a dumping suit against Taiwan Cement Corporation and Japan’s Taiheiyo. The Tariff Commission failed to find sufficient evidence to support the industry’s request for anti-dumping measures. Subsequently, Philcemcor sought refuge through Republic Act 8800, which allows industries affected by import surges to request for safeguards. In November 2001, the Department of Trade and Industry (DTI) authorized the imposition of a temporary additional duty of P20.60 per bag of imported cement. In turn, the industry promised that there would be no price increases during this period and committed to sell cement within the price range P125-P135. With the safeguard measure in place, imports fell from 19% in 2001 to 2.4% in 2002 and 0.08% in 2003. Average prices did fall in 2002. However, since 2003, prices have continued to rise again, averaging P120 in 2003, P147 in 2004, P158 in 2005, P170 in 2006 and P175 in early 2007. During these years, both production and consumption were falling while the construction growth rate was either negative or very low.
Trade liberalization in the 1990s did not lower domestic prices. Imports have been largely limited and have not gone beyond ten percent, except in 2000 and 2001 when import penetration increased from 12% to 20%. This can be attributed to the excess supply abroad and the high domestic prices prevailing in the country. However, rather than compete against imports, domestic firms kept their prices high till 2001. With the imposition of safeguard measures, competition was virtually non-existent as import rates dropped to 0.8% in 2003 and to almost zero in 2004 while domestic prices continued to go up after 2002. In July 2004, the Supreme Court voided the safeguard duty on imported cement resulting in a slight increase in imports.
In examining the determinants of competition in the cement industry, Aldaba (“Chapter 5: Cement Industry Case Study” in Imports to Discipline the Market: Experience of the Philippine Manufacturing Industry, PhD dissertation, University of the Philippines School of Economics, 2007) showed that imports arising from trade liberalization do not have a disciplining effect on domestic firms. Using the same econometric model based on the firms’ financial statements and physical capacity, the study measured the behavior of cement firms and the results showed that leading firms are characterized by collusive behavior. Their tendency to engage in strategic behavior and the use of anti-dumping and safeguard measures as alternative protection instruments have weakened imports’ competitive effect.
While the elimination of trade barriers is a necessary condition, it is not sufficient to generate effective competition if firms can successfully engage in anti-competitive practices. To effectively discipline domestic firms with collusive tendencies, trade liberalization must be accompanied by strict competition policy.
Competition policy becomes all the more important in the presence of international cartels. With increasing liberalization and market integration, large companies including cement firms have formed international cartels that involve several companies operating in different countries. International cartels take the form of a market-sharing arrangement where firms agree to serve only their respective domestic markets without international trade.
A good indicator is the growing number of collusive agreements prosecuted in countries with competition authorities. In 1998, the European Commission imposed fines amounting to 248 million euros on 23 cement producers, which included Lafarge and Holcim. In 2003, the German cartel office sanctioned six companies including Lafarge and Holcim for price fixing and imposed fines of 660 million euros. In 2005, the Taiwan Fair Trade Commission (FTC) punished 21 cement firms including Cemex for engaging in international cartel activities with fines amounting to NT$210 million. The Taiwan FTC found domestic cement firms to have reached an agreement in June 2001 not to export to each other’s market without consent with companies from Japan, Indonesia, Malaysia, Philippines, Thailand and South Korea. In 2005, Lafarge and Holcim were among the three cement firms sanctioned by the Romanian competition authority for engaging in anti-competitive activities with fines amounting to 26 million euros.
In the early 2000s, the House Committee on Trade and Industry initiated investigations on the re-emergence of a cement cartel but no resolution has been made. The DTI also conducted investigations on the alleged collusion among firms to keep cement prices above normal levels but no substantial results have come out. Consumer groups threatened to file a criminal case against the cartel, but this never prospered. Without an effective competition policy, it is very difficult to prosecute domestic cartels and the task becomes even more difficult with international cartels, which require close cooperation with other countries’ competition agencies. While awaiting the legislation of our competition law, eliminating tariffs on cement might be the best way to create a competitive atmosphere and instill some discipline in the market. But this will be nullified if we apply safeguard measures again in an industry alleged to be a cartel.
Table 1: Cement Economic Data: 2000-2006
Sources: Construction Industry Authority of the Philippines & Department of Trade and Industry Price Monitoring Unit (BTRCP-PMU).
Year | In million 40 kg bags | Average Price (P/bag) | Import Ratio (in %) | Construction Growth Rate (in %) | |||
Production | Imports | Exports | Domestic Consumption | ||||
2000 | 299.0 | 37.6 | 33.6 | 303.0 | 126 | 12.41 | 26.3 |
2001 | 284.5 | 58.4 | 46.6 | 296.3 | 144 | 19.71 | -5.0 |
2002 | 334.9 | 16.1 | 37.2 | 313.8 | 85 | 5.10 | -23.7 |
2003 | 326.7 | 2.23 | 41.4 | 287.5 | 120 | 0.78 | -2.3 |
2004 2005 | 326.4 | 0.32 | 38.1 | 288.6 | 147 | 0.10 | 6.9 |
309.2 | 2.9 | 63.4 | 248.7 | 158 | 1.17 | 0.9 | |
2006 | 301.0 | 6.7 | 55.2 | 252.5 | 170 | 2.60 | 4.6 |
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