CEMENT: A WINDOW INTO THE BOLIVIAN ECONOMY

C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 000441

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/01/2018
TAGS: ECON PGOV PREL ENRG EPET EINV BL ELAB
SUBJECT: CEMENT: A WINDOW INTO THE BOLIVIAN ECONOMY

REF: A. LA PAZ 3150

B. LA PAZ 313

Classified By: EcoPol Chief Mike Hammer for reasons 1.4 (b) and (d).

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SUMMARY
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1. (SBU) The Bolivian economy is ripe for more domestic
production. International prices are high for its principle
export products and the economy is overflowing with
liquidity. However, overall growth is constrained by a fear
of government actions and a lack of investment in basic
infrastructure (electricity, water, energy, and
transportation). While inflation may soon provoke even
greater political turmoil, many companies operating here are
making more money than ever. The cement industry illustrates
the tension between the opportunities for expansion and the
constraints which limit Bolivia's growth. (End summary).

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THE BOOM TIMES
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2. (SBU) Overall growth in 2007 for the Bolivian economy
(4.2%) was below the regional average (5.6%),but these
figures mask a domestic market full of opportunities for
companies operating here. Remittances, improved terms of
trade, narcotrafficking, debt forgiveness, and increasing
government spending have pumped tremendous liquidity into the
economy. Banks have reported record profits and construction
grew by over 12 percent nationally, and over 18 percent in
the business hub of Santa Cruz. According to Juan Carlos
Requema, President of the Sociedad Boliviana de Cemento
(SOBOCE),the largest cement maker in Bolivia, domestic
cement production capacity has grown by some 70 percent over
that past year and a half. Requema notes that Bolivia's
potential has drawn international attention. In 2005, the
Mexican cement firm Chihuahua Cement purchased 48 percent of
SOBOCE. According to Requema, international firms realize
the potential for growth in Bolivia, but need a domestic
partner to negotiate the politically difficult operating
environment. (Note: Over 50 percent of SOBOCE is owned by
the family of Doria Medina, a high-profile member of the
Constitutional Assembly. As an additional indicator of the
domestic economy's vibrancy, Requema reported that the Burger
King franchise in Bolivia, which is also owned by the Medina
family, is experiencing even greater growth than the cement
business. End note.)


3. (SBU) Investments are being made across the country in
the cement industry. Gonzalo Arce, general manager of the
FANCESA cement fatory in Sucre, says that they are finishing
upgrades this year which will double the Sucre plant's
capacity (half of their production goes to Santa Cruz).
Moreover, he thinks that by the end of the year the plant
will be again operating at close to 90 percent of capacity
and will need additional expansion. For 2008, and probably
well into 2009, the cement industry is looking at strong
demand. The real question is whether they will be able to
fully capitalize on the opportunity.

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INDUSTRY WORRIES -- WHERE'S THE GAS?
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4. (SBU) Cement factories are large consumers of power. The
SOBOCE plant in La Paz uses around 25 percent of the gas
piped to the city and FRANCESA uses fully 85 percent of the
gas in Sucre. Currently, the pipeline feeding La Paz is full
to capacity and Requema reports constant negotiations with

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the government on gas allocations. The government presses for
less use by the industry and SOBOCE negotiates for steady
supplies. With supply and demand at such a tight
equilibrium, disruptions in gas supply immediately cut
industrial production (a recent shutdown of the cement plant
for gas line maintenance illustrated the point). Moreover, a
tight electricity market further threatens industrial
production (ref A). During the rainy season Bolivia has
sufficient electricity supply (due to several water flow
based electrical generators),but during the dry season there
is more reliance on thermogeneration plants powered by gas.
With blackouts a real possibility over the dry season
(beginning around April) and strong demand for vehicular gas
(politically difficult to ration),SOBOCE is worried that
it's production goals will not be supported by the gas
supply.


5. (C) A new gas pipeline to La Paz is being built and is
expected to be finished by the end of the year. In a risky
move, considering a history of pipeline construction delays,
the SOBOCE plant expansion is expected to be on-line shortly
thereafter. In 2006, SOBOCE sought to hedge its bets by
working with the dysfunctional state hydrocarbon company
YPFB. To comply with government demands to limit gas usage,
SOBOCE sought to power its plant with a form of jet fuel.
They approached YPFB for a small initial order (YPFB is in
charge of all hydrocarbon distribution). After six months of
waiting for the shipment (and suffering through reduced
production),SOBOCE abandoned the experiment only to face
government criticism for not adequately supplying the
domestic market for cement!

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INDUSTRY WORRIES -- THE MORALES ADMINISTRATION
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6. (C) Dealing with the Morales Administration can be a
major headache for all actors in the private sector.
Unfortunately, anti-capitalist ideology has combined with
incompetence to create a very difficult government partner,
especially when it comes to hydrocarbons and natural
resources. Announcements over a year ago of state owned
cement factories financed by the Venezuelans do not
particularly worry the industry; rather, their primary
concens are having to rely on the state for inputs and
dealing with newly "empowered" social organizations. For
example, Requema is worried that SOBOCE will be forced to buy
inferior cement bags from a newly created, state-owned paper
plant (ref B). (Note: Ironically, one government initiative
helped FRANCESA cope with too much demand for its cement. In
2006, Venezuela promised to provide asphalt to Bolivia for
road construction. The Morales administration quickly halted
plans for new roads made of cement. For over a year road
construction stalled but this year, as Venezuelan promises
failed to materialize, the government reversed its stance and
is now moving forward with cement roads (cement is made
principally of lime, which Bolivia has in abundance; asphalt
is petroleum based). Arce confided that without that one year
pause the company would have had to pay penalties to the
government for not fulfilling supply contracts. End note).


7. (C) SOBOCE gets half of its lime from cooperative mining
groups. While relations with these groups remain strong,
Requema has noticed a marked change in attitude since the
Morales Administration came to power: the cooperatives now
feel that they have a champion behind them. These
cooperatives recently demanded that their five year supply
contracts with SOBOCE be renegotiated on a yearly basis.
Additionally, Requema worries that the MAS proposed
constitution, which involves the state in the distribution of
all minerals, would force the industry to negotiate with the
state for raw material inputs.

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COMMENT
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8. (C) Industries which can capitalize on the highly liquid
domestic economy will probably continue to do well throughout
2008, despite energy bottlenecks and an intrusive state. The
biggest threat to economic stability is inflation. The
government is clearly worried and is desperately trying to
hold down food prices by importing foodstuffs and selling
them at subsidized prices. The floods in Eastern Bolivia are
exacerbating the problem. The government reported inflation
rate was 1.7 percent in January and is set to surpass that
level in February. As Bolivia's political process lurches
forward, increased inflation and government mismanagement of
the economy threaten both Bolivia's potential economic growth
and, perhaps, the MAS political agenda.

GOLDBERG