CEMENT CRISIS TRIGGERS SHOCKWAVES IN JAMAICA

UNCLAS SECTION 01 OF 03 KINGSTON 001286

SIPDIS

SIPDIS

STATE FOR WHA/CAR (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

E.O. 12958: N/A
TAGS: ECON EFIN EIND JM
SUBJECT: CEMENT CRISIS TRIGGERS SHOCKWAVES IN JAMAICA

REF: KINGSTON 555


1. Summary: An ongoing cement shortage has caused immense social and
economic fallout, with potential negative implications for Prime
Minister Portia Simpson Miller's fledgling administration. In 2004,
despite strong opposition from interest groups, the GOJ yielded to
pressure from the Caribbean Cement Company, Limited (CCCL) to raise
the duty on imported cement to approximately 40 percent (15 percent
is CARICOM's Common External Tariff (CET),with an additional 25.83
percent "safeguard"). By late 2005, however, CCCL faced quality and
production difficulties (reftel) which hampered construction
projects and stalled economic growth. In response, the GOJ
announced a three-month waiver of the safeguard. Cement importers
were reluctant to respond to this incentive due to the short
timeframe, so to alleviate the crisis, the GOJ removed both the
safeguard and the CET for a period of one year. Industry sources
told emboffs that supply should normalize by July, but the GOJ will
face strong resistance in attempting to re-implement the tariff when
the one year waiver expires. End summary.

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Background
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2. Caribbean Cement Company, Limited (CCCL) is a subsidiary of
Trinidad Cement, Limited (TCL),and is currently the only domestic
source of cement in Jamaica. Facing stiff competition from cement
importers, CCCL complained in 2003 to the Anti-Dumping and Subsidies
Commission (ADSC) that its viability was being threatened and argued
for protection. Interest groups - led by the Incorporated Master
Builders Association of Jamaica (IMBAJ) - vigorously opposed the
request. In a meeting on May 30, IMBAJ President Michael Archer
told emboffs that CCCL used a proposed USD 100 million expansion
project to influence the GOJ to increase the duty regime to protect
the company.


3. The GOJ mandated the ADSC to carry out an investigation under the
Safeguard Act to study the industry and to recommend a new tariff
regime. By December 2003, the ADSC found that cement had been
imported in such increased volume as to cause injury to CCCL. It
recommended a provisional safeguard measure in the amount of 25.83
percent to remedy or prevent serious injury, as well as to allow
CCCL the time to complete its upgrade in order to achieve
international competitiveness. Despite opposing submissions from
IMBAJ, among others, the ADSC reconfirmed its findings and
recommendations in July 2004. The GOJ therefore applied the
increased 25.83 percent tariff rate on top of CARICOM's 15 percent
Common External Tariff (CET) in November 2004, for a period of four
years.

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Cracks Appear At Cement Company
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4. By November 2005, buoyant demand to support a booming
construction sector, as well as quality and production difficulties,
precipitated a major shortage of cement to the local market
(reftel). CCCL initially blamed the shortage on strike action and
torrential rain, but by February it was forced to recall 500 tons of
faulty cement and halted delivery. The company then admitted that a
breakdown in its quality control system was responsible for the
delivery of sub-standard product. When CCCL realized its quality
assurance system had failed it decided to import from its parent
company, TCL. However, increased local and regional demand meant
that TCL could not supply its Jamaican subsidiary. This forced CCCL
to look outside CARICOM, but ironically the high tariff rate made
this economically undesirable. The company therefore agreed with
importers that a tariff review was necessary to ease the shortage.

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Shortages Shock Economy
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5. The cement shortage shocked the Jamaican economy, with real GDP
for January to March 2006 growing by only 1.4 percent due in part to
a 6.3 percent decline in construction output, a far cry from the
seven percent growth recorded in 2005. With less than two-thirds of
daily demand being met, a number of construction projects have been
temporarily suspended. Archer said 80 percent of the country's
limited supply is going to foreign and GOJ projects, a disturbing
situation for local investors, who think the system is stacked
against them. "There is a view that the incentive structure is
skewed against locals", Archer stated. There is anecdotal evidence
of bankrupt contractors due to cost overruns and missed deadlines.
Between 25 and 30 percent of Jamaica's 107,000 construction workers
are now unemployed, he continued. With the construction sector
closely linked to the retail sector, many businesses are recording
steep declines in sales.


6. For some retail outlets the impact has been two-fold: in
addition to losing revenues from cement sales the shortage has also
hurt the sale of complementary items. Chairman of Grace Kennedy and
Hardware and Lumber (H&L) Douglas Orane told emboffs on June 5 that
his company was receiving only 30,000 bags of cement per month, down
from 65,000. To combat falling sales and profitability, Orane asked
the CEO of TCL Rollin Bertram to make up the difference from his
plant in Trinidad, but Bertram declined. This prompted Orane to
question the efficacy of the Caribbean Single Market (CSM),but when
asked to expand, Orane backtracked, suggesting the crisis did not
signal a failure of the CSM, but a failure of TCL. However, he said
it was a sign of CSM weakness if a regional conglomerate favors its
home market in a time of crisis.

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GOJ Slow To React
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7. With supplies drying up and public pressure mounting, Minister of
Industry, Technology, Energy and Commerce (MITEC),Phillip Paulwell,
eventually intervened in late 2005, directing the Jamaica Trade
Board to monitor supplies at CCCL to ensure that demand was being
met. However, it was not until February that the Trade Board
confirmed that CCCL was not meeting domestic demand and recommended
GOJ intervention. Paulwell responded by initially reducing the duty
to the CET of 15 percent for six months, but with importers
unwilling to risk returning to the market on such a short-term
basis, the supply problems intensified. There were increased calls,
even among his People's National Party (PNP) supporters, for the
resignation of Paulwell, who has a history of costly policy
blunders. Facing the biggest test of her fledging administration,
but wanting to support her closest parliamentary ally,
Simpson-Miller announced a full waiver of the tariff for one year,
while stoutly supporting her embattled Minister.


8. On June 1 emboffs met with Permanent Secretary for MITEC, Jean
Dixon, and her team to get the GOJ's perspective on the crisis.
Dixon stated that there were both supply and quality issues at play,
but she preferred to await a report commissioned by the Ministry.
(Note: Unconfirmed reports are that the investigating team has cited
CCCL for dereliction of duty and has recommended that the company
face the full penalties under the law. End note.). She noted that a
shortage of cement on the world market and high regional demand also
affected the ability of the country to emerge from the crisis.
Dixon reported that one investor has equipment in Jamaica to set up
a new plant and another was contemplating the investment. When
asked about the implications the crisis has for the smooth
operations of the CSM, Dixon suggested that the experience can only
help to shape the process going forward and teach policy makers how
to avoid errors in the future.

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Crisis Threatens Fifth Term, But Supplies Trickle In
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9. Despite her overwhelming popularity, the cement debacle is
turning into a nightmare for Simpson-Miller. With general elections
looming, supporters of the PNP are worried the crisis could hurt the
party's chances of winning a fifth consecutive term. Poll results
suggest that Simpson-Miller's popularity, while still high, is
slipping, no doubt due in part to the immense social and economic
fallout from the crisis. Her unwavering support for Paulwell has
not helped her cause, even among colleagues. They are upset that
Paulwell remains so influential in the handling of an issue which
has caused many grassroots supporters to lose their livelihood.
This has not escaped the attention of the opposition Jamaica Labor
Party (JLP),which has used the opportunity to pressure the
embattled Minister to resign. The usually conservative Jamaica
Gleaner newspaper launched a scathing attack on Paulwell for his
history of costly policy mistakes. IMBAJ's Archer said his members
discussed street protests, but that he managed to dissuade them. He
said any re-imposition of the duty, however, would be "politically
explosive" and "could bring the administration to its knees."



10. While supplies have begun to trickle in, things are far from
returning to normality. At the end of May CCCL received 80,000 bags
of cement from Venezuela and most local hardware and retail
merchants were able to receive supplies for the first time in weeks.
On June 23, 200,000 tons of cement finally arrived from Cuba, after
being plagued by transportation logistics problems and poor weather.
Paulwell noted that the ship, once unloaded, will immediately
return to Cuba to deliver another shipment. While daily demand is
still unsatisfied, there has been an easing of the crisis at the
retail level, with some smaller projects resuming. According to
Orane, the sector should return to normal by the middle of July,
when there could be a glut, creating a different set of problems.


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Comment
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11. The cement crisis was not unexpected given submissions presented
to the ADSC during the investigations. However, it was evident from
the outset that the GOJ, searching for success stories, was bent on
protecting CCCL in exchange for the proposed USD 100 investment.
Ironically the policy decision has come back to haunt the Simpson
Miller government and the lost output and associated costs could end
up costing the country multiples of the proposed investment. The
reactionary approach to the crisis also suggest that the GOJ did not
anticipate the potential impact of the shortages, despite being
forewarned about the possibility of CCCL not being able to meet the
expected hike in demand. While Simpson-Miller has lost some support
for her handling of the crisis, her political capital remains high.
The real test will therefore arise when the administration is faced
with the choice of re-imposing the tariff to appease CCCL or
extending it to ward off political and possibly economic fallout.
Already, Archer is warning of the possibility of street protests if
the tariff is re-imposed. Archer said the protests could be as big
as the 1979 gas riots which brought the then-PNP administration to
its knees. This could provide the perfect platform for the JLP to
exploit. End comment.

JOHNSON