Deputy Prime Minister Najib Tun Razak announced on June 20 that from January 2008, the national price of cement would be reviewed every four months and adjusted according to an Automatic Price Mechanism (APM).
At present, cement is listed as a 'controlled item among essential goods' where, along with steel and fuel, prices are set at a ceiling and remain unchanged for long periods of time. There is also a ban on imports, though this is not a significant issue at the moment as global prices exceed the government imposed ceiling price of $97.50 per tonne.
For years, the cement industry has been lobbying for sizeable increases in cement prices, citing escalating coal prices and logistics and packaging expenses which have eroded margins. Indeed, according to the Cement & Concrete Association of Malaysia (C&CA), production cost of cement rose by 30% between 1995 and 2005.
As a result, manufacturers claim that there has been little in the way of incentives and profits to re-invest in expanding capacity, and a temptation to allocate local production for exports into markets where cement fetches higher prices.
In turn, this reduced level of activity has lead to supply shortages, a concern for a building and construction industry in which demand is forecast to increase significantly in the next few years as Malaysia enters the next stages of its 9th Malaysia Plan with a major focus on infrastructure and construction projects.
The Malaysian government raised the ceiling on cement prices by 10% last December, and another increase is expected for later this year. The announcement of an APM took the market somewhat by surprise, and caused share prices for the country's leading cement manufacturers such as Lafarge and YTL Cement to rise sharply.
Under an APM, prices will be automatically adjusted to reflect costs and ensure that there is a reasonable margin to encourage re-investment.
While cement manufacturers are certainly applauding the announcement, the building industry is worried that a cost-plus APM could be abused by manufacturers and that the builders are the ones who will ultimately be impacted by the costs and risks associated with price fluctuations.
The Real Estate and Housing Developers Association (REHDA) has issued a statement objecting to the APM as contrary to national interests. REHDA claims that a cost-plus APM determined by manufacturers could encourage monopoly-like behaviour and create market inefficiencies with manufacturers distorting pricing and under-utilising installed production capacity.
"Ultimately, it will be the builders and home buyers who are forced to absorb these higher prices," Ng Seeing Lion, the president of REHDA, told OBG.
REHDA is especially concerned over the government imposed requirements for developers to allocate 20-30% of their residential projects to low cost housing. A "low cost" home varies by state, but averages $12,000 - an amount they believe is too low to profitably charge in the wake of rising material and labour costs.
REHDA also feels that if the ceiling price is abolished, the ban from importing should be lifted to allow the industry to benefit from lower world cement prices should this occur, saying that manufacturers cannot have the best of both worlds.
The Master Builders Association of Malaysia (MBAM) is similarly opposed to an APM over concerns that fluctuating prices will make bidding and pricing for contracts very difficult. According to the MBAM, the tenure of a contract is generally between two to three years. If a price review is carried out every four months then depending on the project's duration, pricing might have to be adjusted up to eight times.
The decision to move to an APM for cement has left industry players wondering whether a similar decision will be made towards steel prices. There is currently a domestic shortage of steel bars, and according to REHDA, this should not be the case based on production capacity and market demand.
On April 16, the ceiling price on steel bars and billets was increased by 20%, short of the 30% increase asked for by the seven major still millers who control the majority of the country's supply. REHDA believes that the millers are creating an artificial shortage so that they can charge higher prices disguised in transportation, administration and handling charges.
Both REHDA and the MBAM are calling for import bans to be lifted so that builders can source an adequate supply, while the millers would like an APM to decide the price of the material so that increasing production costs can be factored into the selling price.