Archive for April 5th, 2008

April 5, 2008

We have gone from Government by witticism a la Chavez to management by hearsay now. According to Chavez, one of the reasons for nationalizing the cement industry is that cement here is so expensive, that somebody told Chavez that they import it from Europe because it is cheaper. Moreover Chavez says that Venezuelan cement companies export cement to make more money.

Both statements are not only false, but reveal an incredible ignorance about cement and the Venezuelan cement industry. But nobody around him dares tell Chavez how wrong he is.

To begin with, Venezuela imports no relevant amount of cement. Maybe some sacks or trucks get across the border with Colombia, but the amount is basically negligible compared to what Venezuela produces, uses and exports. So, if Chavez actually believed this person, the decision is based on a lie, as simple as that, and demonstrates the level of ignorance being used in making such important decisions.

The world cement industry has become incredibly efficient as essentially three companies, the same ones that are present in Venezuela, compete with each other. They are Lafarge, Holcin and Cemex. All of them have plants all over the place, which allow them to shift cement as it is needed in different parts of the world. Essentially, what these companies have done is smooth out economic cycles by having plants that can shift their sales geographically as needs change.

In fact, that is precisely what did in the Venezuelan cement industry, forcing the owners to sell. The industry used to be owned by Venezuelans who concentrated their business here. When there was a downturn here, they could shift part of their exports abroad, but international competition was tough and they did not have the muscle or economies of scales to compete. During the downturn, plants would not operate at capacity because they were able to export only part of their excess capacity.  That (and some bad management)is how the Vencemos plant, for example, ended in the hands of Cemex, in one of those cycles the company went almost belly up, the owners sold a piece to Cemex with an option in the future to get back part of their shares and they lost the whole thing.

The problem is that transportation is a huge part of the cost of cement. Companies in Venezuela exert regional influence essentially using price. Cemex, for example, has a huge plant in Pertigalete right on the water, which allows it to send cement by sea to the coast of Venezuela, dominating that region. Other companies have plants in various regions, but essentially each plant has to supply its own region, it can’t compete outside the region because transportation costs kill you. (Anyone that has ever tried to lift a sack of Portland cement should understand well what I am talking about)

The beauty of the Pertigalete plant in Anzoátegui is that the mine is right on the water and there is a deep port there. Thus, not only can Cemex dominate the coastal region, but when local consumption drops, it can just export the cement by sea to its other markets in the region. In fact, most people do not even know that Cemex Venezuela comprises cement plants in Venezuela, Panama and the Dominican Republic, allowing the company to dominate the Caribbean region.

While Chavez charges that the cement companies “export” the cement and that is why he can’t build houses that is also a lie. Most of the cement produced in Venezuela has been used locally and it was only in the years with few construction projects that cement was exported. For example, last year, Venezuela produced 7.53 million Tons of cement, of which only 729,000 Tons were exported. The previous year the country produced more 7.7 million Tons, of which 2 million Tons were exported, basically because there was no demand here. Production went down last year 150,000 Tons for the simple reason that the construction market cooled off elsewhere and there were no international buyers. Plants simply produced less.

Thus, knowledge is not being used to make decisions in this country, which is costing us a lot of money. We now have a new decision making tool: Management by hearsay.

It was also hearsay that drove Chavez to buy a dairy company recently. Someone told him the company had 37% of the milk production market, so he ordered his underlings to buy it at any price, despite the fact the company only produces 10% of the milk in the country. None of his yes men has been capable of telling him the truth and we see ads claiming the Government will certainly increase the 37% to 60% soon just to please the autocrat. Amazing!

Thus, Venezuela will spend US$ 2-2.5 billion to buy perfectly working cement plants, which are run efficiently, rather than spending it on hospitals, infrastructure and the like. These companies will supply the country with cement, but as downturns come and go, it will be unable to compete with the monsters we are buying the companies from and the operations will lose money. Additionally, as the companies are run with a “social” purpose in mind, they will become inefficient, there will be little technological investment and maintenance and the companies will certainly go in the hole. We have already seen that in CANTV and Electricidad de Caracas and it has not been even a year since they were taken over by Chavez.  (The recent EDC bond, for example, was issued in such a way that it was costly for the company and was made up simply to make some people very rich)

So, we will tag alone and unfortunately this governing by hearsay will one day explode all at once when there is no money to run any of these projects. Nothing new in this, Carlos Andres Perez did it in the 70’s with disastrous results. When oil prices dropped in the early 80’s the currency crashed and there was no money for the people, as the companies had to be kept running.

Of course, Chavez, whether in or out of Government at that time, will say he left it all functioning well and it is the Empire that is behind the whole thing. And the cheerleaders of the revolution will still believe it.

It is almost hopeless.