Zimbabwe Review

Reflections on Zimbabwe

Nothing learned about price controls in many years

Posted by CM on September 2, 2008

The Financial Gazette in a recent issue had an article with the heading Cement firms on brink of closure.

There have been so many of these ‘collapse’ speculations about various sectors  of the Zimbabwean economy over the last ten years that I tend to take them with a grain of salt. Which is not to deny that things are extremely difficult for companies as well as for individuals trying to stay afloat. But the cement industry, and countless others, have been ‘on brink of collapse’ for years now but somehow keep going, holding on for better times.

The immediate cause of this ‘collapse’ story is a familiar one: price controls. For political reasons, government insists on dictating the costs that companies should charge for various goods and services, even if those mandated prices are below the cost of production. It is essentially an order for companies to operate at a loss.

The argument argues that the price caps would have been reasonably imposed to prevent exploitation by businesses able to charge as they like in a hyper-inflationary environment compounded by shortages of many goods.

Of course the arguments on both sides are much more involved than this, but the details of those contrasting arguments are not the subject of this post.

Excerpts:

The selling price of cement is set by the government-run National Incomes and Pricing Commission (NIPC), which accuses companies of hiking prices to foment public anger against President Robert Mugabe’s administration, charges denied by industrialists.

Despite the hyperinflation and a rapidly deteriorating exchange rate, there have been inordinate delays by the Commission in reviewing the price of cement, resulting in the cement price falling well below cost.

The industry, dominated by Pretoria Portland Cement (PPC), Circle Cement and Sino, has been pushed into a situation where it is no longer viable to manufacture cement. Currently, the selling price of cement is less than 10 percent of the cost of production.
The industry, which is the lifeblood of the construction industry, has in the past, and is again, being forced into considerable borrowings from the banks, at punitive interest rates to settle creditors accounts, while the NIPC debates the setting of a revised cement price. These increased borrowing costs will have to be recovered from the new price — thus pushing up the price of cement in the long run, according to industry sources.

“This is not to the benefit of the producers or the consumers,” said PPC finance director Gavin Stephens when contacted for comment this week. “Furthermore, when the NIPC does finally grant an increase, the hike in the selling price is considerable, causing major hardship to consumers. Small regular increments would be of benefit to both the consumer and the producer,” he added.

Investigations by The Financial Gazette revealed that the Commission has in the past approved increases in the prices of power (15, 419 percent), coal (12,700 percent), slag (8,630 percent), rail transport (18,000 percent), gypsum (5,064 percent), which are critical inputs in the production of cement. During the period of these input price hikes, cement price was only let up from $500 a bag to $1 000 a bag.

Industry sources said at the current price, manufacturers couldn’t produce because they cannot afford the input costs.

A property magnate alleged that cement manufacturers were ex-porting clinker, a critical raw material in the production of cement, he-nce the current shortages. Cement producers, it is further alleged, were exporting cliner to earn foreign currency required to import spares and replace antiquated machinery. It is also alleged that cement manufacturers had resorted to charging in foreign currency in order to circumvent the price controls and remain viable.

A bag of cement, which is only found on the illegal parallel market, ranges between US$10 and US$15.

Except for the figures, almost every detail  of this story could have been recycled from 10 years ago. Cement has been available on the regular market only in fits and starts for at least that long, with some combination of all the reasons given in this story blamed for the shortages and the regular, huge price increases.

What is depressing about the situation is its dull same-ness. Seemingly very little has been learned about the most effective ways to do so if government feels compelled to interfere with supply and demand.

Advertisements

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

 
%d bloggers like this: