HONDURAS: PRICE CONTROLS BECOMING WEAPON OF

C O N F I D E N T I A L SECTION 01 OF 02 TEGUCIGALPA 002127 SIPDIS SIPDIS NOFORN STATE FOR EB/ESC, WHA/EPSC, WHA/PPC, AND WHA/CEN STATE FOR D, E, P, AND WHA TREASURY FOR AFAIBISHENKO STATE PASS AID FOR LAC/CAM NSC FOR DAN FISK E.O. 12958: DECL: 11/08/2016 TAGS: EIND EINV HO SUBJECT: HONDURAS: PRICE CONTROLS BECOMING WEAPON OF CHOICE? Classified By: Classified By: AMB Charles Ford for reasons 1.4 (b) and (d) ¶1. (C) Summary: Once again, the GOH seeks to impose price controls on the private sector, adding cement to the list of commodities the GOH has capped or attempted to cap in recent months. Also on that list are sugar, palm oil, credit cards, and of course, gasoline and petroleum products. Post is convinced that the cement producer LaFarge is guilty of past incidences of predatory pricing and price collusion, but whether the present price hike was justified or not is far from clear. As is increasingly its wont, the GOH has denounced the price hike without having first done any market research, and refuses any company explanation or action short of a full price rollback by the company. Meanwhile, the new Competition Commission -- the GOH organ specifically designed to address cases like this -- stands to one side, silent and impotent, lacking both the staff and funding to carry out its mandate. End Summary. ¶2. (SBU) The GOH Ministry of Industry and Commerce has issued an ultimatum to cement producer Incehsa that it must roll back its recent price increase of 6.39 lempiras (USD 0.34) per 94 pound bag of portland grey cement, or face government action. The firm argues that input costs (including coal) have seen price increases that justify the price hike, and has thus far refused to reduce prices. Vice Minister of Commerce Freddy Cerrato is quoted in press accounts dismissing that answer, saying instead that "the government firmly rejects any offer short of eliminating the price increase." ¶3. (SBU) Last week the GOH announced its plans to set price controls on palm oil, noting its concern that prices for that product sometimes go up or down. Two weeks ago, the debate was over setting price controls on sugar, when sugar producers tried to raise prices (reportedly for the first time in three years). The month before that, Congress passed a bill (currently still in the style committee) that set rates and fees for credit cards. And, of course, the GOH has held gasoline and other fuel prices frozen since last April (a price freeze that importers, notably U.S. firms Esso and Texaco, have been forced to absorb and have not been reimbursed for yet.) ¶4. (C) In the specific case of cement, it is difficult to have much sympathy for the firm. Incehsa is a joint venture between French multi-national cement producer LaFarge and the Honduran army, and it was condemned in a GOH report in 2004 of using predatory pricing tactics to drive U.S. cement producer Cemar out of the market. Despite a report from the Attorney General and the Ministry of Commerce attesting to this predatory pricing, Incehsa was never charged with or convicted of a crime. There are also allegations of corruption involving USD 12 million in mysterious tax forgiveness to the firm in 2004. Post assesses that Incehsa was able to carry out this predatory pricing scheme only by working in collusion with the only other cement producer in Honduras, Cementos del Norte (Cenosa),whose president is current Minister of the Presidency Yani Rosenthal. ¶5. (C) Comment: That said, the GOH's reflexive use of price controls is highly disturbing, and profoundly anti-market. No economic studies have been done to determine if all or part of the cement price increase is justified, nor has the new Competition Commission conducted any analysis of whether the two cement companies are manipulating prices or otherwise exercising monopoly power. This lack of investigation by the commission is due in large part to the fact that the GOH delayed for six months in even naming the commissioners, and nearly a year after passing the law has yet to provide staff, office space, or a budget to the commission. It is worth recalling as well that the first GOH list included as one of the three proposed commissioners the Chief Operating Officer of Cementos del Norte, Rosenthal's company. This was seen as a clear attempt to prevent the commission from taking any effective action against the cement producer, and was TEGUCIGALP 00002127 002 OF 002 successfully blocked by Post and others. It would appear that Honduras is now reaping what it has sown, paying what the United Nations commission on Latin American economic studies (CEPAL) notes are the highest cement prices in the region. End Comment. Ford FORD