A Cement Cartel?

Examining the recent agreement to set the price of cement

Recently, the main cement manufacturers in Nigeria (Dangote, BUA, and Lafarge) agreed with the Federal Government (Ministry of Works and Ministry of Industry, Trade, and Investment) to slash the price of cement to between N7,000 to N8,000 per bag. This came after the price soared to between N13,000 to N15,000 per bag. Despite this reduction, housing developers have argued that the price is unsustainable and, in the context of a housing crisis, we need much lower prices in order to build affordable housing.

Nigerian cement and complaints of high prices are like 5 and 6. In 2021, Nigerian cement prices were 240% higher than the global average. And, this is in spite of efforts by successive governments to subsidise, protect, and develop the sector, through restricting forex for cement imports, tax incentives, among other measures. Not to mention the fact that most of the raw materials for cement are available in Nigeria.

That being said, this is a Competition Law column, so, let us look at the legality of this arrangement from a competition law perspective, seeing as this seems to be a very straightforward agreement to fix the prices of bags of cement.

Price Fixing 

Price fixing is when competitors agree to set the prices, for the goods or services they provide. In other words, substituting independent commercial decision making for coordinated decision making, often to the detriment of consumers. It is explicitly prohibited under Section 107 of the Federal Competition and Consumer Protection Act, 2018 (FCCPA), and because it is one of the gravest antitrust offences, it could, under certain circumstances, lead to imprisonment of the directors of the companies involved.

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” – Adam Smith, The Wealth of Nations.

In 2022, when Nigerian airlines simultaneously increased their prices to a minimum rate of N50,000 for domestic flights, the Federal Competition and Consumer Protection Commission (FCCPC) immediately opened a price fixing investigation. According to the FCCPC’s press release, the coordinated price increases came “after a series of meetings over a period of three weeks … [where] the attendees engaged in mutual discussions and exchange of their respective revenue management models or other commercially sensitive information”.

A classic example of conduct that warrants a price fixing investigation.

However, one might argue that the cement manufacturers should not be subject to a price fixing investigation because, by virtue of Section 106 of the FCCPA, a defence to anticompetitive conduct is that the conduct in question was ordered or required by a regulatory agency that has jurisdiction over the relevant sector or industry. In this context, the fact that the Federal Government facilitated the agreement could, in theory, amount to a regulatory direction.

But, ‘kó lé werk’ (it cannot work) because there is no ‘regulator’ of the cement sector, as such. At least, not like how the communications sector is regulated by the Nigerian Communications Commission, or how the insurance sector is regulated by the National Insurance Commission. If there was such an agency, and if that agency directed cement players to charge a set price, then this provision could exempt the arrangement from scrutiny.

Since that is not the case, it seems that a price fixing investigation should be conducted.

However, a price fixing investigation might still be avoided if we reframe this Federal Government intervention as price regulation, because Section 88 of the FCCPA gives powers to the President (and presumably, by extension through delegation, the Ministers) to control prices for the purpose of regulating and facilitating competition.

Already, we have a problem: it is not clear that the Federal Government justified this intervention in terms of ‘regulating or facilitating’ competition, and we also do not know whether this intervention is linked to a broader plan to improve the competitiveness of the cement sector.

Conditions for Price Regulation 

Be that as it may, Section 88 includes a specific list of conditions that must be satisfied before prices can be regulated, namely (i) the goods or services will be supplied or acquired in a market that competition is limited or is likely to be lessened; (ii) it is necessary or desirable for the prices to be controlled in the interests of users, consumers, or suppliers; and (iii) the price regulation must be narrowly designed (in terms of the duration and the goods and services affected) in a way that is necessary to remedy the lack of competition.

Section 88 also provides that, before the President regulates prices, the FCCPC must submit a report on the state of competition in the relevant market. The report must provide recommendations on the desirability and likely effects of price regulation vis-à-vis other measures (although there is no requirement for this report to be published, whether in a Gazette or elsewhere, so we cannot say for sure whether this has actually happened). After the President makes an order, Section 89 allows the FCCPC to recommend that the order should be amended, varied, or revoked.

Importantly, the President retains the final say on price regulation.

It is important to emphasise that price regulation is typically seen as a last resort, and rightly so, because governments generally struggle to make business decisions and could end up distorting the relevant market. Also, market forces of supply and demand are more effective than the government at setting prices because their ability to adapt, in real time, to changing market realities makes them better able to reflect the true value of goods and services (at least, in theory).

Competition 

So, before resorting to price regulation, we must try other measures to reinstate market forces, and to do that, we must first think about why competition is not working in the first place and whether we can fix it.

Granted, there are only three main players in the cement market to serve a country of an estimated 200+ million people (maybe due to high costs of entry), so competition is naturally going to be limited. Still, it is obvious that competition need not be limited. Three players in a market can compete intensely, provided they are properly incentivised to do so through proper enforcement of Competition Law. 

As such, when markets aren’t competitive, and they could be, we have to ask whether Competition Law is being properly enforced.

In Nigeria’s cement sector, this is a very pressing question; not just because of the high price of cement and the housing deficit and crisis, as noted above, but because the cement sector across the world is notorious for high prices caused by price fixing cartels. In fact, competition agencies in many other countries have found such cartels to exist in their cement sectors.

Saudi Arabia 

For instance, in 2023, Saudi Arabia’s General Authority for Competition fined 14 cement manufacturers a total of $37 million for colluding to raise prices and divide the market. In 2022, China’s State Administration for Market Regulation issued a total of $65 million in fines on 13 cement companies for price fixing, and an additional $500,000 on the Shaanxi Cement Association for coordinating the cartel. In 2019, the United Kingdom’s Competition and Markets Authority fined 3 concrete companies a total of $45 million for price fixing and market sharing.

There are also examples from Taiwan ($7 million fine in 2023), and South Korea ($1 million fine in 2023), Zambia (amount undisclosed, but 10% turnover fine imposed in 2021), Colombia ($68 million fine in 2017), India ($800 million fine in 2016), and many other countries.

Together, these interventions deterred price fixing, prevented coordinated pricing, and ultimately lowered the price of cement in their respective countries. What we can learn from these interventions is that, competition intervention is more effective in the long-run than price regulation, because it can fix the broader structural issues in a market that produce sub-optimal prices. I suppose my real issue isn’t so much with the Federal Government’s decision to regulate prices – it seems that a plausible case could be made that the requirements of Section 88 have been satisfied (save for the FCCPC’s report, as noted above).

My issue is more with the way in which Section 88 has been drafted.

Conclusion 

Ideally, price regulation should not be permitted, save for very exceptional circumstances, because competition intervention is almost always a better alternative, as we can see in Zambia. To reflect this, Section 88 should include language to the effect that competition intervention must first be attempted to remedy the sub-optimal prices and the lack of competition.

In addition, the President should not have the final say on whether prices should be regulated because he/she would likely use it to serve a political end. Rather, a team of economists and other technical experts within the FCCPC should be responsible for engaging with companies, customers, and suppliers to ascertain the appropriate price.