Trade reforms, in particular reduction and/or removal of tariffs on imports, are aimed to bring about lower prices of certain goods. In the case of the cement industry, though, despite the government’s imposition of zero tariffs on cement imports, the price(s) of cement continued to rise unabatedly. Why? What explains this? Read on...Philippines, cartel, cement industry, cement prices, zero tariff

Aldaba, Rafaelita M.

English

Research Papers in Economics

Philippine Institute
for Development Studies
Surian sa mga Pag-aaral
Pangkaunlaran ng Pilipinas
Policy Notes
No. 2010-02 (June 2010) ISSN 1656-5266
PIDS Policy Notes are observations/analyses written by PIDS researchers on cer-
tain policy issues. The treatise is holistic in approach and aims to provide useful
inputs for decisionmaking.
The author is Senior Research Fellow at the Institute. She wishes to thank Mr.
Donald Yasay and Ms. Fatima del Prado of PIDS for their assistance in obtaining
the data on cement prices. The views expressed are those of the author and do
not necessarily reflect those of PIDS or any of the study’s sponsors.
Looking at the different economic
characteristics of cement firms, this Note
argues that the firms can collectively exert
market power. This has resulted in weak
competition to the detriment of consumers,
particularly small users. Hence, even with the
government’s recent zero tariff policy on
cement imports, cement prices have gone up
unabatedly. Without an effective competition
law, the country has very little recourse against
industry collusion and cartel.
The backdrop
Early this year, Senator Francis Escudero urged
the Department of Trade and Industry (DTI) to
explain why cement prices surged to P270 per
bag, which is double the price of two years
ago (Senate of the Philippines 2010).
Consumers have complained that despite the
economic slowdown due to the recent global
financial crisis, cement prices did not drop.
This is in contrast to the report (Osorio 2010)
that prices of other construction materials
like steel fell by 30–60 percent in 2008 while
prices of production inputs like crude fuel
dropped from US$140 to $40 per barrel and
coal from US$200 to below $100.
In response, the Cement Manufacturers
Association of the Philippines (CEMAP)
announced last month that price increases are
necessary despite sluggish demand because
manufacturers are seeking to recover high
production costs (Ho 2010). Republic, the
local associate of La Farge, also announced
that it implemented a price hike of P8 per
bag in May because of increased operating
costs (De Vera 2010a). Holcim, meanwhile,
earlier warned of higher prices in the second
Why cement prices remain high
despite zero tariffs
Rafaelita M. AldabaPN 2010-02
2
Policy Notes
quarter due to the power shortage in
Mindanao (De Vera 2010b).
History of perennial price increases
In the past ten years, rising cement prices have
always been an issue in the country. Both the
DTI and the House of Representatives conducted
investigations in the early 2000s to look into a
possible collusion among members of the
alleged cartel. Given the perennial price
increases amid excess supply and weak demand
during this period, many analysts suspected
that a cartel was at work. The industry
association, then known as Philippine Cement
Manufacturers Corporation (Philcemcor),
countered that the price increases were
inevitable due to the firms’ high production
costs and finance charges (Aldaba 2002).
Figure 1 shows the behavior of the average
monthly price per cement bag from January
1993 until December 2009. Cement prices
increased steadily during the following periods:
1993 to early 1997, January 1999 to December
2001, and from December 2002 onwards. Note
that coinciding with the 1997 Asian financial
crisis, mergers and acquisitions within the
industry took place from 1997 to 1998. A
continuous drop in cement prices was observed
during these years. A safeguard duty of P20.60
per bag on cement imports was also temporarily
imposed from November 2001 until the end of
2004. During this time, cement manufacturers
agreed with the DTI not to raise prices. Yet,
while cement prices briefly declined until
November 2002, they started to increase
unabatedly thereafter.
With mounting calls from various sectors to
bring down cement prices, the government
temporarily removed tariffs on cement for six
months through Executive Order (EO) 766
issued in November 2008. After said EO
expired in June 2009, EO 819 extended it for
another six months. Prices, however, still
remained high. In mid-December 2009, prices
in Metro Manila and nearby provinces went up
to as high as P260 per bag, from P205 per
bag in early December, due to an artificial
shortage created as the big three cement
companies Cemex, La Farge, and Holcim
decided to simultaneously shut down their
plants in Antipolo and Bulacan for annual
maintenance activities.
The alleged cartel issue: sources
of market power and why zero
tariffs do not translate into lower
prices
Like other homogeneous goods such as
sugar and flour, cement is often
Figure 1. Cement average monthly prices
Source of basic prices: Department of Trade and Industry, Philcemcor, and NEDA for earlier years in
the 1990s.PN 2010-02
3
Policy Notes
characterized as a market that is prone to
collusion. Moreover, cement is a type of high
weight-to-value product with high transport
and handling costs. Hence, it is often
classified as a nontraded good. While
potential competition from imports is
important as a mechanism to control market
power and ensure competition, this is of little
practical value because of the substantial
costs of import entry. Cement can be imported
in bulk, but this will entail a bulk handling
facility that would require a substantial
amount of investment. On the other hand,
shipping cement in bags will entail extra
handling costs that could easily translate to
increases in price. These factors limit the
procompetitive effects of imports on the
industry and provide a natural protection
against imports.
Note, however, that substantial imports
penetrated the country in 2000 at 5 percent
tariff as a result of the global excess supply
and low prices arising from the Asian financial
crisis and in response to the relatively high
domestic prices prevailing in the country.
It seems, however, that traders do find the
business of importing cement too risky and
costly. For instance, based on an interview
conducted by Isip (2009), the cost of
imported cement, including transport and port
integration charges, is about P178 per bag.
The ex-factory price of locally manufactured
cement, on the other hand, is P185 per bag
and with mark-up and transport cost of P10
per bag, the retail price is around P205 per
bag. Despite this, though, traders consider
the price difference between landed cost and
ex-factory price as insufficient to cover the
huge risks involved in the cement import
business.
Even at zero tariffs, traders still consider
cement importation a high risk business.
According to them, it is not viable due to
high logistic costs and to the fact that local
cement manufacturers have the market power
to easily match or underprice imported
cement. In the same interview by Isip (2009),
she noted that traders are aware that local
manufacturers can easily bring down their
prices in areas where any shipments come in.
Moreover, they know that imported cement
can only compete with a small segment of the
market composed of small users since local
manufacturers have long-term contracts with
big customers and contractors wherein they
(local manufacturers) provide special
discounts for bulk sales.
Cement imports have thus been historically
small. Table 1 shows that there were, in fact,
only two years when imports as a percentage
of total domestic supply exceeded 10 percent.
These were in 2000 (13%) and 2001 (19%).
Traders pointed out that the only way for zero
tariffs to have an impact on prices is through
owner-supplied importation in areas where port
integration charges are cheaper. But doubts
abound on whether DTI’s plan of bringing in
cement through the Philippine International
Trading Corporation would be a feasiblePN 2010-02
4
Policy Notes
Table 1. Industry statistics (in million 40-kg bags)
Year Production Total Domestic Imports Exports Import Export
Sales Supply  Ratio Intensity
1998 515.52 512.00 515.76 7.25 3.43 1.41 0.67
1999 502.28 502.40 493.76 18.98 27.65 3.84 5.51
2000 478.36 472.84 482.28 63.16 57.32 13.10 11.98
2001 455.12 453.80 468.56 89.33 74.56 19.06 16.38
2002 535.88 531.92 504.04 13.50 41.39 2.68 7.72
2003 522.68 523.60 484.80 0.39 39.22 0.08 7.50
2004 522.28 519.64 487.36 0.51 32.78 0.10 6.28
2005 494.72 501.28 463.40 4.65 42.16 1.00 8.52
2006 481.32 487.80 468.56 9.75 28.98 2.08 6.02
2007 521.92 522.64 520.44 12.08 14.26 2.32 2.73
2008 534.76 524.16 528.68 4.53 21.93 0.86 4.10
Note: Total sales cover domestic sales and exports. Domestic supply is production less exports.
______________
1 The price elasticity of demand measures the
responsiveness of demand to changes in price. If demand is
inelastic (value less than one), a price increase will
increase total revenues while if demand is elastic (greater
than one), a price increase will decrease revenues (Khemani
and Shapiro 1993).
a cement plant. Moreover, demand for
cement is inelastic1 which provides
another important source of power to
firms to control prices.
All these characteristics tend to
indicate that cement firms can
collectively exert market power and
their price behavior seems to show that
they are indeed able to exercise it. As
such, competition has been limited and
has negatively affected consumers,
particularly small users. The history of
coordination in the industry bolsters
the presumption that individual firms are not
acting on their own and are consciously
engaged in implicit coordination.
This can be seen in Figure 2 which shows the
pricing behavior of the industry, using changes
in monthly cement prices (expressed in
constant terms with 1985=100) from January
1993 to December 2010. Cement prices are
seasonal; they rise during summer and fall
during the rainy months. Notice the near
uniformity and symmetric price movements
throughout the 16-year period illustrated in the
figure. The threat of a price war and fear that
departure from such behavior may lead to costly
price cutting, lower profit margins, and market
instability have prevented firms from engaging
in competition. As Philip Roseburg of La Farge
Philippines described their behavior (Ferriols
2001):
In any industry, you can fight for a
bigger market share but someone has to
solution. Is the government ready to pay the
high cost of another price stabilization scheme?
The Philippines’ recent experience shows that
even with the removal of tariffs, competition in
the industry has remained weak. In the early
1990s, for instance, cement prices were
deregulated, import restrictions were lifted
while tariffs were set at a low rate of 5 percent.
Yet, the high and rising trend of cement prices
seems to indicate that previous trade
liberalization and even the more recent tariff
elimination are not enough to ensure that
markets would perform efficiently. The industry
has remained highly concentrated, with three
firms controlling almost 90 percent of the
market. Entry barriers are also high because of
the large capital requirements needed to operatePN 2010-02
5
Policy Notes
give up that market share… But
obviously this wouldn’t work with our
competitors here…they will fight and
then we get into a bloody battle where
everyone ends up bruised. Given the
opportunity, yes, we can try and
improve our market share. But I don’t
want to lose out in the end and trigger
another price war… LaFarge has no
plans of rocking the boat. We wouldn’t
make a run on market share, we want to
keep it as stable as possible.
In general, monthly price movements have
ranged between -10 and +10 percent except
for a few outlier years in 1998, 1999, and
2000. Figure 2 indicates that for the years
1993 and 1994, the highest price changes of
around 6–7 percent took place during the
month of March. From 1995 to 2000, price
changes peaked during the month of January
registering 11 percent in 1995, 6 percent in
1996, 2–3 percent in 1997–1998, and 33
percent in 1999. The
latter were merger and
crisis years when prices
were declining. From 2001
to 2009, the largest price
changes were registered in
April. These ranged from 6
to 9 percent except in
2002 when cement firms
promised DTI that they
would not increase their
prices in exchange for the
additional duty imposed
on cement imports.
Implication for policy:
need for competition law
In countries with strong competition laws,
cartels are illegal and are treated toughly. In
the Philippines, though, in the absence of a
clear, comprehensive, and enforceable
competition law, the task of prosecuting
cartels has been difficult. Since the DTI does
not directly deal with cartels as a competition
issue, it could not penalize anticompetitive
behavior.
Since the early 1980s, there have been
various attempts to legislate new competition
laws. However, most of these have remained
pending, indicating the lack of appreciation
and political will to legislate a comprehensive
competition law for the country. During the
11th Congress, there were two House bills that
proposed the creation of a fair trade
commission. In the Senate, two bills
sponsored by Senators Sergio Osmena III and
Juan Ponce Enrile were presented. In the 13th
Figure 2. Monthly percentage change in cement prices (1985=100)
Note: Current prices were deflated using construction deflator from the National Income Accounts.PN 2010-02
6
Policy Notes
Congress, there were three competition bills
filed by Senators Osmena III, Manuel Villar,
and Enrile. In the recent 14th Congress, the
bill of Senator Enrile was able to move and
got approved by the Committee. However, the
process has since been stalled at the House of
Representatives.2
Conclusion
The outcome of cartel behavior is against public
interest and is highly distortive of economic
efficiency. Cartels limit competition and allow
firms to manipulate prices to the detriment of
consumers and other industry users, including
the government. The experience of the cement
industry illustrates that trade liberalization does
not automatically lead to competition in the
domestic market. Given the characteristics of
the industry, incentives are present for firms to
engage in anticompetitive practices. Thus,
removing import restrictions and eliminating
tariffs are not enough to ensure competition.
One important lesson is the need to accompany
trade reforms with measures to increase
competition. Without an effective enforcement
of competition law, the country has very little
recourse against cartels and collusion. 
References
Aldaba, R.M. 2002. Of cartels and collusion: an
analysis of the Philippine cement industry.
Chapter 3 in Toward a national competition
policy for the Philippines, edited by E. Medalla.
Makati City: Philippine Institute for
Development Studies.
De Vera, A. 2010a. Republic Cement hikes prices.
Manila Times. 4 May.
______. 2010b. Holcim warns of cement price
increase. Manila Times. 26 May.
Ferriols, D. 2001. Special Report: Why cement
prices remain high despite influx of cheap
imports. Philippine Star. 24 February.
Ho, A.L. 2010. Cement price hikes “necessary”—
Cemap. Philippine Daily Inquirer. May 31.
Isip, I. 2009. Risky business traders unwilling to
import cement despite zero tariff. Malaya. 30
March.
Osorio, M.E.P. 2009. DTI vows to act on cement
prices. Philippine Star. 30 April.
Senate of the Philippines. 2010. Press Release
[online]. 8 January. http://www.senate.gov.ph
/press_release/2010/0108_escudero1.asp
[accessed 1 June].
Khemani, S. and D.M. Shapiro. 1993. Glossary of
Industrial Organisation Economics and
Competition Law. Paris: Organisation for
Economic Co-operation and Development
(OECD), Centre for Cooperation with Economies
in Transition.
For further information, please contact
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Philippine Institute for Development Studies
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E-mail: raldaba@mail.pids.gov.ph; jliguton@mail.pids.gov.ph
The Policy Notes series is available online at http://www.pids.gov.ph. Reentered
as second class mail at the Business Mail Service Office under Permit No. PS-
570-04 NCR. Valid until December 31, 2010.
___________
2 The Enrile bill aimed to penalize combinations or
conspiracies in the restraint of trade and all forms of
artificial machinations that will destroy, injure, or prevent
free market competition. In the House, the Cua bill
proposed the creation of a Philippine Fair Trade Commission
to investigate, gather evidence, and initiate prosecution of
those engaged in unfair trade practices.

Cement price hikes “necessary”— Cemap. Philippine Daily Inquirer.

DTI vows to act on cement prices.

Holcim warns of cement price increase. Manila Times.

Of cartels and collusion: an analysis of the Philippine cement industry. Chapter 3 in Toward a national competition policy for the Philippines, edited by

Why Cement Prices Remain High despite Zero Tariffs

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