WHAT MATTERS MOST: Cement and competition
NOW THAT THE DUST has settled on the pricing of cement in Barbados, it is instructive to take a concrete look at the circumstances confronting the market. It is well known that the construction and tourism sectors are best suited to inspire an economic turnaround. Incorrectly, all of the focus has been on tourism during this prolonged downturn.
Construction is the best indicator of economic reality. In times of boom, it is the subject. In times of bust, it is the object. In other words, it is the sector that best reflects economic truth. Naturally, the local plant is a victim of the last eight years. Yet, it is not praised for its survival techniques.
Any attempt to analyse the cement market reveals a major policy contradiction. On the one hand, there is a buy local campaign to encourage domestic production. This did not apply in dealing with the local cement plant. In similar vein, sugar production is below domestic needs and importation is acceptable.
In the face of a buy local campaign, it is remarkable how easily the importation of cement was facilitated with special privileges in respect of the removal of import duties and location of storage. The local value added in cement is quite high, which makes it an ideal product to protect.
The privileges extended to imported cement have resulted in a price war without any apparent impact on construction cost. So how has the local plant been able to cope with the competition? The answer to this question may be very instructive.
The first thing to notice is the survival of the local plant in a prolonged economic downturn. It is one of the most vulnerable businesses with respect to government policies. The freezing of wages coupled with excessive taxation is a recipe for reduced spending. When the appetite for building houses is compounded by the removal of tax allowances, it is evident that local construction will face ongoing difficulties.
In the business sector, it is recognised that there is an excess supply of accommodation. This means that any new construction would have to be specialised. In the circumstances, the focus seems to be on large projects that may be won by particular contractors.
It is evident that the export market may have to be the saviour of the local plant in the foreseeable future. The plant exports most of its production. This speaks to the issue of its competitiveness abroad, once bulk is its forte. Historically, fiscal incentives have been used to allow such businesses to compete externally.
Barbadians have constantly wondered why they are able to purchase products made locally more cheaply in the region. The fiscal incentives are designed to achieve such price competitiveness along with bulk purchasing.
Notwithstanding the incentives, there has been some downsizing to address operational inefficiencies that accumulated over several years. It must be recalled that the plant was owned by the Government. This might have caused excesses in several areas of the plant. In the face of managerial inefficiencies, perhaps inspired by some political factors, the local plant has had to work longer than most at repositioning itself under new ownership.
As a result of the recent dramatic shift in policy, the repositioning had to be accelerated. So the plant has become a victim of contradictory policy. It is now okay for a production plant of a high local value added product to compete with a differentiated product. Policymakers no longer seem capable of arguing a case for domestic production, even when the circumstances are most favourable.
Having been forced to react to a change in policy, the local plant must be grateful that it stumbled on much lower energy costs, especially lower oil prices. The latter is perhaps the major reason why the company has been ableto respond to the pricing of theimported product.
However, it is important that the local plant continues to focus on improving its efficiency. Oil prices are not going to remain at present levels. The key to survival is ongoing innovation. This is only achievable with a return to profitability.
There must be a compelling case for some protection in small states. Certainly, it must be cheaper to import chicken. It is the most important item in the cost of living index, yet local production is somewhat protected. Is it the monopolistic nature of cement production that is at issue? If so, then the policymakers need to know an awful lot about the imported competition and this ought to have taken time.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party advisor on the economy. Email: firstname.lastname@example.org