|MASTER BUILDERS ASSOCIATION MALAYSIA’S (MBAM) RESPONSE TO CEMENT PRICING MECHANISM|
The unexpected announcement of the automatic price mechanism (APM) for determining cement prices effective 1 January 2008 as announced by YAB Deputy Prime Minister Dato’ Sri Najib Tun Abdul Razak on 18 June 2007 and further commented on by International Trade and Industry Minister Dato’ Seri Rafidah Aziz has created grave concern among contractors and developers.
As the 9th Malaysia Plan (9MP) goes into higher gear in the first quarter of 2008, it is important that the supply of building materials such as cement is constant and the prices stabilized. Although various ministries concerned will monitor the implementation of APM, it is imperative that a full study of the impact be carried out first. Master Builders Association Malaysia (MBAM) strongly protest against the implementation of APM based on the argument delineated below and it is hoped that the Government would reconsider the decision.
Cement is a major and essential component for the country’s construction industry. The country consumption of cement totaled 19.5 million metric tonnes in 2006 and the consumption is expected to increase due to developments under the 9th Malaysia Plan(9MP). The need for price stability and reliable supply of building materials to the construction sector cannot be underemphasized.
On average, 50% of building materials used in a project comprises cement and cement related products such as cement sand bricks, plasters, concrete roof tiles, RC piles, concrete culverts, ready-mix concretes, drainage etc. As such, very little new construction activity can be undertaken without the use of cement. Being an essential item, the Government has imposed price control to protect consumers from sudden surge in price. In this way, price stability is ensured and the development of the country is not hampered.
What is APM?
In Malaysia, Ministry of Domestic Trade and Consumer Affairs (MDTCA) regulates the prices of motor gasoline (mogas), diesel and liquefied petroleum gas (LPG) via the APM. The APM for petroleum products contributes towards predictable margins for oil companies and provides price stability for consumers. The APM formula for the petroleum industry contains fixed elements such as operating expenses, dealers commission and company profit and other variables like refined product costs, excise duty and subsidy from the Government.
Where the petroleum industry is concerned, the APM determines how much the rise in product costs will be subsidized by the government. Although, there is no model for cement APM at the moment, the main principle is that of a cost plus mechanism which would ensure predictable margins for cement manufacturers.
Why is there a need to change to Cement APM?
It would appear that only the input from the cement manufacturers were taken into account, as there have been requests from the cement industry to the Government for an increase in cement prices to offset increases in production costs which consists of utilities and packaging. Cement manufacturers had sought product price increases to match those in the region. Developers and contractors are disappointed that no prior consultation was carried out with the main players of the Malaysian property and construction industry consisting more than 2,000 developers and 60,000 contractors.
1. No explanations and justifications for APM
b) Fossil fuel such as petroleum are subject to exhaustion, but cement raw materials, especially limestone, are abundant. Why should APM be used for cement?
c) No conclusive analysis has been carried out on what the total impact to contractors, developers, builders and the man on the street would be with the implementation of APM.
d) Many contractors are still adjusting to the previous 10% price increase of cement from approximately RM9.90 per 50/kg bag to RM 10.90 effective 1 December 2006. There are contractors that are finding it difficult to continue with their projects, as they are unable to absorb the sudden cost increase.
2. Unhealthy and uncompetitive oligopoly of cement manufacturers
b) Cement manufacturers would determine prices based on a cost structure that cannot be examined or determined by consumers or the Government.
c) There are also issues on who is to establish base price and who will decide on the viable base price.
d) Cement manufacturers do not need Government intervention and protection, as they are already making substantial annual profits even with a price control in place. Rather, it is cement consumers who are more urgently require Government support in order to weather the rising costs of building materials. (Please refer to Appendix 1 on Summary Profit and Loss for Cement Companies in Malaysia)
e) An APM would encourage monopoly-type behaviour among the cement manufacturers, creating market inefficiencies, distorted pricing and underutilization of installed production capacity.
3. Impractical and cumbersome to track APM and forecast future prices
b) Current price controls are not effectively monitored and enforced by authorities. In fact more manpower and experts will be needed to implement and monitor APM. Thus, monitoring a regularly updated APM from abuse would be impractical and more burdensome to carry out.
c) It must be noted that there is too many by products of cement and there will be chain reactions that would resonate with price increases for cement-based products.
1. Allow Free Market Forces to Decide Price of Cement
2. Allow importation of cement
3. APM for low-cost, low medium cost and Price Fluctuation Clauses
In view of the above, MBAM reiterate our objection towards the APM on cement and any other building material. The main argument is that the APM is a cost-plus mechanism that guarantees profit for cement manufacturers. While cement manufacturers enjoy a no-loss situation, end users are left to absorb all risks and costs.
Dated: 13th July 2007
|< Prev||Next >|