Mauritius’ cement imports amount to Rs 1.8 – 2 billion annually. Up to mid-2011, there were three players supplying the local market with the State Trading Corporation (STC) providing 50% of domestic demand, and Lafarge and Holcim, two international companies, accounting for the remaining 50%.
The STC used to invite international bids for the supply of cement and the price so obtained would act to regulate what the local price of cement should be.
In April 2011, however, Cabinet took the decision to liberalize the import of cement. Before this decision, arguments were aired in public to the effect that the STC’s involvement in cement trade was hindering development of Mauritius’ cement market.
It was being said that the fix-price for bagged cement and the sharing of the import quota on a 50-50 basis between the STC and other importers was “deterring new entry on the market” and that it carried “little incentive for existing cement operators to expand their activities”. The latter argument was meant to convey that the existing framework was acting as a constraint on Holcim and Lafarge to intensify their activities and to go for exports based in Mauritius.
On its part, the Competition Commission of Mauritius was of the view in 2011 that the proposed liberalization of the local cement market should be proceeded with in a gradual manner. It proposed that the import restriction may be removed in a first instance and that the withdrawal of price control should only be considered once additional players entered the local cement market. But the Cabinet went ahead, asking the STC to withdraw altogether from the market.
Even though others, such as Binani Cement, were keen to come over and add local value by getting into processes like clinkering in Mauritius and exploring regional markets, nothing really materialized. Consequently, with the STC gone, Holcim and Lafarge filled up the gap immediately. They even went downstream claiming 55 per cent and 45% per cent, respectively, of the domestic market for wholesale bagged cement. By the end of 2012, the domestic price of cement had increased (not decreased) by 21%, despite the price of fuel oil, a significant input going into the cement industry, having declined. Even today, there is no such fall in the price of cement on the domestic market, despite the dramatic fall in fuel oil price since mid-2014.
Consequently, the domestic cement market has remained in the hands exclusively of Holcim and Lafarge since after the departure of the STC. Was this the expected final outcome of the decision taken in 2011? Maybe. There are numerous barriers to entry, such as having to secure an Environment Impact Assessment (EIA) certificate from the EIA Tribunal, undertaking massive capital expenditures to stock cement, proving that the factory would not add to traffic congestion if located in a crowded place like Port Louis and taking a long term view on the viability of the project. Given the size of the local market and the presence of the two global cement giants, it was not obvious Holcim and Lafarge could be easily made to cede any significant part of the local cement market to competitors.
Here’s an interesting tailpiece to this unfolding story. Holcim and Lafarge have been in discussion since last year in view of a merger of their businesses. The merger is near concluded by now and the new company will most likely be headquartered in Geneva, Switzerland. Not only will its global sinews be much stronger to tackle by a small country like Mauritius. It will also be able to cut down rivals to size, given the economies of scale and greater control over markets with which it will operate in its new version.
In the process, Mauritius has disbanded its STC, given out the domestic market to the remaining two cement suppliers and is now ending up with a single entity, the merged Holcim-Lafarge company, a global giant having the capacity to manipulate the price of cement not in the domestic market but much more upstream at the global level. The Competition Commission of Mauritius (CCM) is in the presence of an undertaking from Holcim-Lafarge to divest the shares held in Holcim to a new purchaser once the global Holcim-Lafarge merger is completed. The Chief Executive of the CCM is inclined to recommend to the Commission the acceptance of this undertaking. What else?
The question is: should Mauritius go back to the STC-Holcim-Lafarge formula of 2011 before the Cabinet decision to disband the STC if that could help Mauritius buy its cement not at a continuously increasing price as it has been the case? We are seeing here one of the negative facets of capitalism in which, when you are too small, you must play the game by the rules set down by those who hold the sway on the global market.
* Published in print edition on 22 May 2015