Builders say automatic price mechanism will raise costs, Malaysia

Builders say automatic price mechanism will raise costs, Malaysia
Published: 02 January 2008

Two bodies representing builders are worried that the automatic price mechanism (APM) for setting cement prices, due to take effect today, would further increase their cost burden and in turn affect new property launches.

The Real Estate and Housing Developers Association of Malaysia (Rehda) and Master Builders Association Malaysia (MBAM) said in joint statement that “any attempt to further increase the price of cement will definitely affect project costs. Inevitably, this will result in upward revision of prices of new housing and property launches.”

Deputy Prime Minister Datuk Seri Najib Tun Abdul Razak made the announcement on the automatic price mechanism (APM) earlier last year.

The two associations, whose members are the main end-users of cement, said the APM was not in the interest of the industry or property buyers. They called for the scrapping of the APM, saying cement prices should remain status quo.

“Cement is a major and essential component of the construction industry. The country’s consumption of cement totalled 19.5 million tonnes in 2006 and it is expected to increase due to the planned developments under the Ninth Malaysia Plan,” MBAM president Patrick Wong said.

On the average, cement and cement-related products such as cement sand bricks, plasters, concrete roof tiles, reinforced concrete piles, concrete culverts, ready-mixed concrete, drainage, among others, comprise 50% of the materials used in a project.

The Government believes the introduction of the APM would give reasonable profit margin to encourage re-investment by cement manufacturers, because prices would automatically adjust to costs.

But Wong, and Rehda president Ng Seing Liong, said “with the APM, cement prices would be revised every four months. And, with regular review, the industry believes there is a high tendency that prices would be revised upwards instead of downwards.”

“Developers and contractors are disappointed that no prior consultation was made with the main players of the Malaysian property and construction industry, consisting of more than 2,000 developers and 60,000 contractors,” Wong said.

According to Wong, cement makers had asked the Government for an increase in prices to offset rises in their production costs and to match prices in the region.

He suggests that for the interim, cement should remain a price-controlled item to ensure that the rollout of infrastructure and housing projects, especially affordable homes, are not affected.

“In the long run, the Government should consider allowing free market forces to decide the price of cement. By opening up the market, market forces will find their own equilibrium and this would cause prices to be more stable,” Wong said.

Ng added that since the price control on cement would create market distortion, in the form of shortages, its import should be allowed.

“As it is, contractors and developers are paying RM10.90 per 50/kg bag effective Dec 1, 2006 when the price before adjustment was RM9.90 per 50/kg bag despite cement operators operating at 60% of capacity,” Ng said.

“Imports would ensure uninterrupted supply of cement. This would also encourage competition and greater efficiency among local cement manufacturers, instead of unhealthy and uncompetitive oligopoly,” he said.