The government has asked cement manufacturers to not raise prices in the spirit of keeping prices of goods stable as COVID-19 pandemic takes over; and it looks like cement companies have agreed. Let that sink in: cement manufacturers have agreed to reverse the price hikes. This is strange!
To review, during last week of April, cement makers in the north zone raised prices by Rs45-55 per bag arguing that prices were being brought up to the same level as last year now that demand was recovering (cement prices had plummeted over the last year). True, demand was recovering. In the north zone, cumulative cement sales were up 12 percent in 9MFY20 year on year. In February, cement sales grew 46 percent against the corresponding month last year.
But the timing of price increase was suspect. Major cities had just gone in a lockdown which was reflecting in cement volumes as well — total sales shrunk 14 percent in March with north-sales down 10 percent (first negative growth in the year).
The price hike was a signal. PM Imran Khan had just announced the construction package which was immediately being seen by developers and builders — with many projects stuck at initial stages — as a boon. Though the additional demand due to the construction package would not materialize immediately, the palpable excitement from builders was a sign that things will soon start moving in the right direction.
The construction package serves as a set of incentives to achieve the ambitious 5 million housing promise made by the PM, first presented to the nation when he joined the high office. He announced the Naya Pakistan Housing Program (NPHP) and in fact, had inaugurated 20,000 flats right before the pandemic hit the country.
To its credit, the government recognizes that at the heart of the housing crisis is a little light bulb blaring red — a light bulb labelled affordability. Though supply of housing needs to be created, the demand is mostly in the low, low-middle and middle-income housing segments where access and affordability are major barriers. While many issues of affordability still remain unaddressed, the government did announce a Rs30 billion subsidy (mechanics of it are unknown) that may be a drop in the bucket, but a drop, nevertheless.
However, it has been clear all along that when demand of construction materials goes up, manufacturers will raise prices (read more: “Construction amnesty: Caution is advised”, April 6, 2020). All the government can do here is ensure that the market is free, fair, competitive, open to new players, and not cartelized. Perhaps businesses can keep prices stable if government appealed to their charitable sides or whatever other spirits one wants to invoke in them, they cannot keep prices on the same level for long periods of time. This can only be temporary and very short term.
But rising construction cost is certainly a concern. Consider this: when NPHP was first announced, it was estimated that 5 million houses will cost around Rs4.5 trillion. This was based on the conservative estimate that per unit cost of urban housing would be around Rs1.5 million (now known to be impossible. Read more: “Roti, Kapra, Makaan- maybe not today”, April 15, 2020). Following that year, inflation rose. Between Aug-18 to Aug-19, Consumer Price Index (CPI) inflation grew 12 percent while price index for construction items grew 14 percent. Using these inflation numbers alone, the total estimated cost for 5 million houses has already grown by Rs630 billion (Read more: “Housing for some”, Dec 24, 2019). That’s 21x of the existing subsidy.
This may seem exaggerated given that 5 million housing number is used for this calculation, but it should give a pause. The government cannot keep asking manufacturers to not raise prices. That’s not a policy, certainly not one the government can bank on.