Currency collapse, price controls hit Sri Lanka’s Tokyo Cement in 2018
Wednesday July 24, 2019
ECONOMYNEXT- Sri Lanka’s Tokyo Cement Company (Lanka) Plc said it was badly hit by a steep currency collapse in Sri Lanka in 2018 amid a slowdown in the construction industry, while price controls made the firm run losses but had turned around in the March 2019 quarter.
Sri Lanka’s price control agency has given a 100 rupee increase per 50 kilogram pack of cement in February 2019, allowing the firm to make profits.
"The most detrimental external aspect for Tokyo Cement, was the unexpected rate of rupee depreciation," Chairman Harsha Cabraal told shareholders.
The rupee fell from 153 to 182 to the US dollar in 2018 as the central bank printed money to push down rates and later injected liquidity to sterilize (fill) liquidity shortages from defending the peg on a shifting convertibility undertaking.
"As we are entirely import dependent, our foreign exchange exposure considerably increased the cost of clinker, bags, and freight, over the course of the year," Cabraal said.
"This loss was compounded by local retail losses, as cement is a price controlled commodity and we had to absorb the product cost increase until a maximum retail price increase revision as approved.
But steel which had no price controls had raised prices 45 percent he said. Steel imports are protected to give profits to politically connected businesses, pushing up house building cost for ordinary people, and making hotels and Sri Lanka’ exports uncompetitive, critics have said.
Skimping on steel due to high import taxes may also pose safety risks, critics say.
Due to delays in payments by the government and liquidity shortages many smaller construction had gone out of business, Cabraal said.
"Industry liquidity was also squeezed due to delayed payments by foreign contractors for large scale government projects," Managing Director R S Gnanam said.
"While the local construction industry follows a 90 days credit rule, foreign contractors demand a 120 days credit period, which is unsustainable for local sub contractors.
Foreign contractors also use tenders to "push down" the price of local contractors, Gnanam said.
The firm had lost 283 million rupees on retail sales with 183 million in the December quarter.
Tokyo Cement group lost 463 million rupees in the year to March 2019 down from a profit of 2.3 billion rupees a year earlier.
In the March quarter it made a profit of 181 million rupees or 45 cents per share.
The rupee has so far appreciated to 176 to the US dollar amid a private credit collapse, and the central bank instead of printing money is now mopping up liquidity from dollar purchases (sterilizing inflows).
There have been calls to reform the central bank so that it cannot target both the exchange rate (defend the peg) and a ceiling policy rate (print money), generating monetary instability, depreciation and output shocks frequently. (Colombo/July24/2019)