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). -------------- SUMMARY -------------- ¶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). -------------- THE BOOM TIMES -------------- ¶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. -------------- INDUSTRY WORRIES -- WHERE'S THE GAS? -------------- ¶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 LA PAZ 00000441 002 OF 003 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! -------------- - INDUSTRY WORRIES -- THE MORALES ADMINISTRATION -------------- - ¶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. LA PAZ 00000441 003 OF 003 -------------- COMMENT -------------- ¶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