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You will prepare and submit a term paper on Banning Exports of Cement in Saudi Arabia. Your paper should be a minimum of 2250 words in length.
You will prepare and submit a term paper on Banning Exports of Cement in Saudi Arabia. Your paper should be a minimum of 2250 words in length. The decision by the Saudi government to stop and ban the exportation of cement was prompted by the soaring domestic prices of building and construction materials. In the subsequent discussion, we will attempt to identify and explain the cause(s) of such a shortage, and factor(s) leading to the imposition of the ban. In addition, we will assess the reasons for its partial uplift and subsequent reinstatement, how the government’s actions translate to monopolistic behavior. Finally, we will analyze the impact and effectiveness of the monopolistic strategy on the economy and in particular in relation to the country’s projected economic growth.
Discussion and analysis
Despite being the highest producer of cement among GCC countries, Saudi Arabia has recently been experiencing cement shortages. This is because the manufacturing companies export most of their products to the international market to fetch higher prices. The exportation of blocks of cement has grown steadily between 2004 and 2007. In 2006, the cement export volume was quoted as 2.26 million tones. Total production over the same period was estimated at 33.1 million tones against a local consumption level of 31.2 million tones. This translates to a shortage of approximately 0.36 million tones locally.
Figure 1: Trends in cement export from Saudi Arabia
Source: El-Qua, O, Hasa, F, Desai, A, Rout, B & Gupta, S 2007, p.8
The table below provides the total production of clickers and cement as between regions in the Kingdom in 2006.
Table 1. The regional actual production of cement and clinker
Source: El-Qua, O, Hasa, F, Desai, A, Rout, B & Gupta, S 2007, p.7
These statistics show the total production of cement in Saudi Arabia was 33.1 million tons in 2006. However, the total consumption of cement in the same year was about 31.2 million tones (El-Quqa, Hasa, Desai, Rout & Gupta 2007, p. 9). Comparing the above statistics, it is evident that there has been a shortage of cement in the local market. Since this trend has continued, the government responded by banning exports of cement to alleviate the shortage in the local market.
In 2009, the ban was partially lifted following an upsurge in demand in the Middle Eastern countries. Another factor was the continued fall in the country’s GDP growth rate projections for the past 2 years forcing the adjustment on foreign trade policies to boost the balance of payments. The ban has had little effect on the cement manufacturers. According to Jimaa (2011), cement sales in the Saudi Arabian market (local market) had grown from “3.61 million tons to 4.61 million tons between April 2010 and April 2011” despite the 2009 export ban (p. 2). In 2011, domestic demand for cement in Saudi Arabia rose to 48 million tons, and Economists predict that the demand is likely to rise to more than 50 million tons by 2013. Based on the increasing construction projects currently taking place in Saudi Arabia, economists have predicted growth in demand throughout this year (2012). This means that companies will have sufficient demand in the local market. Therefore, the government ban on exports will not affect the sales for the companies.
The figure below shows forecasts for demand in cement since 2007. It is evident that the demand has been increasing gradually throughout the years. Economists predict a similar trend between 2011 and 2013. This implies that sales per company shall increase within the local market now that the government has banned the export of cement.
Figure 2: Trends in cement demand
Source: Hasan, K, Karman, H, Faruqui, U& Alyaqout, T 2011, p.15
Therefore, the inference is that the current ban on export and high levy on cement imports by the government will not affect the performance of the cement manufacturers in Saudi Arabia.
Saudi Arabia has been experiencing a growing economy since 2010. The average growth in the GDP of the Kingdom is about 6.8% for the last four or so years. The construction industry accounts for more than 8% of Saudi’s economic growth. In fact, it has the largest construction market is in the Middle East” (Al-Nagadi 2008, p. 104). As illustrated by the figure below, economists predict an increasing GDP throughout this year.
Figure 3: Trends in GDP of Saudi Arabia
Source: El-Qua, O, Hasa, F, Desai, A, Rout, B & Gupta, S 2007, p.4
Arab News (2012) interprets that growth in the economy will result in investment into housing and other infrastructure such as roads and hospitals both at private and public levels (p. 110). This means that domestic demand for cement will rise. the sales and hence the performance of these firms in Saudi Arabia will not be affected by the government's decision.
Furthermore, the increasing population in the Kingdom provides a bright future for cement firms. Since 2010, the Kingdom has recorded a high rate of population growth. It has a growth rate of about 2.4%. The population has grown from 27.6 According to the theory of monopoly and law of demand/supply, reduction in supply increases the price. Therefore, local firms will sell their cement at higher prices and achieve equal profits they used to realize before the ban.
A monopoly is defined as one having the exclusive control of a commodity or service in a particular market, or a control that makes possible the manipulation of prices. In other words, a monopoly is the presence of only one firm within an industry. The power that a monopoly firm possesses will always depend on the existence of comparable substitutes produced by rival industries and the barriers to entry, which the monopolist is able to create.
Reasons for the export ban include:
1. To match growing demand in the local market especially with multibillion, dollar infrastructure projects underway e.g. Dubailand project quoted at $5B.
2. To ensure price stability over the commodity locally
3. To ensure there is enough supply.
The government’s strategy is designed to create efficiency and legislative monopoly in the industry. Legislative monopoly is achieved through the Ministry of Commerce’s limit on the quantity exported, the pricing, and the tax levy on imports. This reduces the competition level between local manufacturers ensuring that each firm best meets its quota of local market demand. Efficiency monopoly is established in view of the diminished cost of production. Cement production is highly energy-dependent amounting to 30-40% of total production costs. Saudi Arabia is the world’s largest oil producer resulting in relatively low fuel prices, consequently lowering the marginal cost for these firms.
Barriers to Entry
A barrier to entry is a restriction or impediment, which works to exclude new firms from entry into a particular market. Such barriers may be economic, social, or even politically motivated. For example, a government can create a monopoly over an industry that it wants to control by placing restrictions on trading terms or supply. Another way a government may create a monopoly is by holding the exclusive rights to some natural resource.
Such is the case in Saudi Arabia, the world’s largest oil producer, where the government has sole control over the oil industry, which accounts for approximately 45% of the Kingdom’s Gross National Product. In recent years, the Saudi Government has looked to an economic growth strategy of diversification to reduce its economic dependence on oil and as such, has targeted the cement industry.
It also resulted in a cement shortage in the local market when in 2008. domestic prices soared due to companies exporting large quantities of cement in order to take advantage of higher profits.
A firm’s monopoly may be safeguarded by some form of legal protection. A clear example of how the Saudi government has created a barrier to entry to protect its monopoly is through the creation of legal impediments.
Due to the local cement shortage in 2008, the Saudi government initially responded by placing a trade restriction on cement exports. From May 2009, cement makers in Saudi Arabia were only allowed to export up 10 percent of their cement reserves if they held a Ministry of Commerce issued license. As mentioned above, in recent weeks an extreme version of legal protection in the form of a complete ban on exports was implemented. again, this keeps a supply of a necessary raw material (cement) from consumers such as rival nations and foreign companies.
Guaranteed supply of cement offers a boost to the intense construction projects undergoing in Saudi Arabia. A shortage means delays. delays translate to monetary losses i.e. operational costs to the construction firms and lost revenue to a government keen on changing the country’s GDP base from oil-dependency to tourism and cultural dependency according to forecasted depletion of oil reserves within the next 50 years.
The ban has had little effect on local cement manufacturers. According to Jimaa (2011), cement sales in Saudi Arabia has increased by 1 million tones in 1998-1999. It is expected that this demand will grow to over 50 million tones by 2013. This means that the local demand would be large enough to meet the production over the same period.
Lasting monopolies are those sustained through government policies. With the GDP growth rate in Saudi Arabia projected at an average of 6.8% over the past 4 years and in view of the immense expenditure on infrastructure alongside the anticipated population, growth of 2.4% the demand for cement in the building and construction industry seems secure-for the moment. The change in foreign trade policy serves to guarantee this position in accordance with the country’s growth objectives.