Saturday, March 29, 2008

Cement in Oman

Arabian Business:
Oman said on Saturday [March 15] it was considering reducing import duty on building materials in an effort to put a cap on rising inflation in the construction sector.

"We are revising the import duty on building materials to help reduce the cost of cement, steel and wood," Chamber of Commerce and Industry Chairman Khalil Al-Khonji told reporters.
...
Oman had restricted the import of cement two years ago to support the sale of local firms Oman Cement Company and Raysut Cement Company, but the move caused shortage in the market.

Said Al-Barwany, chairman of Al-Barwany Construction, told newswire Reuters Oman needed an extra 20,000 tonnes per day of cement to help reduce the shortage.
The price of cement has doubled in the past year, according to Baljit Singh, a building materials trader.

"A 50-kilogram bag of cement rose from 2.4 rials ($6.24) last Sunday to 3.6 rials today; it is too much. This time last year, it was only 1.3 rials per bag," Singh said.

Meanwhile, Oman Cement is in discussions with the government on plans to raise the price of cement to offset the soaring price of imported clinker, which is used to make cement, Chief Executive Jamal Al-Hooti told Reuters last week.
Muscaticonfidential points to evidence that this is a black market in cement. According to the Oman Tribune,
Two Asians were caught red-handed while selling cement at exorbitant price in the Wilayat of Ibri on Tuesday [March 24].

The two expatriates were selling cement at the rate of RO2.900 per bag.

The arrest was made as part of a campaign run by the Ministry of Commerce and Industry against people manipulating prices.
...
In spite of the Ministry of Commerce and Industry’s continued inspections to check illegal trade practices and the arrests being made by the police, in addition to the authorities’ warning of stringent action against the violators, some traders and their aides have been ignoring the warnings and were selling cement at high prices.
Trade Arabia adds,
Oman Cement Company, the country's largest cement firm by market value, said it is in talks with its government owner about raising prices or possibly face a fall in profit this year.

'If we don't increase cement prices by 1 to 2 rials per tonne, profit might come down in 2008,' Oman Cement chief executive officer Jamal Al Hooti said in an interview in Muscat on Wednesday [March 12].
Black market opportunities for profit exist when buyers cannot fulfill their planned purchases at the official price. In other words, there is a shortage, a gap between the quantity buyers would like to purchase at the official price and the quantity sellers are willing to produce. Frustrated buyers are willing to buy (a smaller amount) at a price above the official price, sometimes much more. The "Asians" had a profit opportunity if they could acquire cement at the official price and resell it at a higher price.

A natural question is how the black marketers came into possession of the cement in the first place. The most innocent possibility is that they were able to purchase it without any favoritism from the original seller be it from a producer or an importer. Otherwise, there is some corruption involved beyond the violation of selling above the official price.

Import duties do not create shortages. They reduce imports, and drive up the domestic price. Shortages are created by price ceilings -- the official price above which it is illegal to sell. These prevent price from rising to bring the quantity demanded into balance with the quantity supplied.

The additional complication in the Omani cement market is that the major domestic producers are government owned. Yet the government-owned cement producers have to obtain permission from the government to raise the price. What they can do, as is evident from the fact of a shortage, is restrict quantity; they are not obligated to satisfy demand for cement at the official price. If their objective is to maximize profit, or to meet a target level of profit, then an increase in the price of an input (in this case clinker) will decrease the amount they are willing to produce at a given cement price.

Reducing the import duty would reduce the shortage. So would raising the official price for cement.

Speaking of cement, is this the headline you'd give this story?:
Growth in cement imports plummets

Growth in cement imports into Dubai slumped 60% last year, state-owned conglomerate Dubai World said on Sunday, without giving a reason for the drop.

Dubai World said cement imports shot up 73.6% to 2.960 million tonnes in 2007, but the growth fell well short of the 184% increase in imports seen in 2006.
My point is, 73.6% growth is enormous growth by any measure.

And finally, on the cement front, the UAE has eliminated the duty on cement and rebar to ease inflation.

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