On That Price Crash

Alhaji Putin surprised his friends and haters alike on Sunday with a 40% drop in the price of his flagship Dangote Cement product:

In a move that will raise the stakes in the rapidly evolving Nigerian cement market, leading cement manufacturer, Dangote Cement Plc, has announced huge cuts in the price of the essential product.

In a step that will make cement cheaper than it has ever been since 2005, the new price regime announced by the Group Managing Director of Dangote Cement, Mr. Devakumar Edwin, said the company has pegged the Dangote 32.5 cement grade at N1,000 per 50kg bag, while the higher 42.5 grade is to sell for N1,150 per bag.

The new prices exclusive of the Value Added Tax (VAT) represents about 40 per cent discount on the prevailing market price of the product which is currently sold for N1,700 irrespective of the grade, across the country.

I didn’t see that one coming and annoyingly, I am now at risk of having nothing to complain about on this blog. As you know (or don’t know), I am an Adam Smith Stan and one of my favourite quotes of his was from his Magnum Opus, The Wealth of Nations:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce

Given my almost religious belief in the above statement, it is hard to complain about this price drop – cement is not an accoutrement of garri or rice. It is produced to build houses and infrastructure and the cheaper it is, the more of those things get built.

Given his dominance of the Nigerian cement industry (among others), this move has naturally generated a lot of chatter and analysis online, in what is perhaps somewhat commentary on Nigeria. Almost all the points people have raised as to why he may have made this move have merit – from him wanting to eliminate competition in the market to it being an election gimmick to aid the reelection of Goodluck Jonathan.

So what is it? Why did he do it? I can assure you, I have absolutely no idea why. It could be one thing, it could be a number of things.

But what I would say is that the rules of analysing a ‘normal’ market don’t work in this case. Given that the Nigerian government is a big player in the cement market – by way of banning imports – it is difficult to properly account for that factor, let alone analyse it. The quote below explains why:

ABUJA — PIQUED by the soaring prices of cement in the country, President Goodluck Jonathan, Monday, summoned the Chairman of Dangote Group, and other cement manufacturers with a directive to crash the prices of the product within 30 days period or face the wrath of the government.

Presidential spokesman, Mr Ima Niboro, who announced Jonathan’s decision after a meeting in the President’s office, said the manufacturers had agreed to do all that was necessary to meet the one month time frame.

Remember that? That was in May 2011 (so not exactly an election gimmick) and in the end it turned out to be an elaborate ruse. If prices were indeed ‘crashed’ back then, it must have been a blink-and-you-miss-it type of crash.

The point is that in a market where the President can ‘order’ manufacturers to ‘crash’ prices, you might as well throw away all your analysis textbooks. All we know is that Dangote Cement has said prices are coming down by 40% – it still needs to happen as distributors can claim they are still going through their old stock and thus refuse to lower prices. To further drive home the point that the Nigerian cement market is a market in name only, one of Alhaji Putin’s competitors, Alhaji Rabiu (shall we christen him Alhaji Medvedev going forward?) had this to say yesterday:

What Alhaji Dangote has done today is significant. I am very pleased about it because it would make the cost of the product more easily affordable to Nigerians. With this price reduction, more consumers will be able to buy the product and subsequently drive up demand and in turn increase market share for industry players.

“I hereby urge all cement producers to emulate Dangote and bring down the cost of cement. There is absolutely no reason for a bag of cement to cost so much.

“Despite the infrastructure challenges being faced by the manufacturing sector of the Nigerian economy, it does not justify the high cost of cement.

“On our part, I have already directed all our plants to follow suit and implement the new price regime. We still believe that more can be done to bring down the price even further for the benefit of Nigerians,” Rabiu stated.

This is comedy in its purest form and when supposed competitors are behaving in this manner, you know  FF’s Law of Nigerian Business is in operation. To wit; where 2 or 3 Nigerian businessmen are gathered, a cabal is soon formed. You’re welcome.

All of this means that we can’t really rely on these guys to drop prices when they like or when a game is being played. It is better to have a decent market operating where consumers always have as many choices as is reasonably possible. There is no meaningful reason to continue banning imports anymore – Dangote and co should now be able to stand on their feet, not just in Nigeria, but in Africa and then the world. It is time to take away the feeding bottle of government protection so they can start eating meat.

As for the announced price crash – apply C Caution.

FF

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10 thoughts on “On That Price Crash

  1. Feyi:

    Let us enjoy the price reduction; folks like you that have been complaining say “na Alhaji Putin no let you build house for Naija” should quickly take advantage of this opportunity before “Alhaji Putin + Alhaji BUA withdraws this favor” – LOL

  2. Pingback: On That Price Crash – Y! Opinion

  3. We should now push for them to bring the price to N500 as a further show of their generosity – the problem with that though is that “they will not feature prominently on the Forbes List in 2015” – and I doubt we all want that? LOL

    We should be rooting that Naija should be well-represented on that list – as “we must not carry last”…

  4. A welcome development nonetheless…. The news broke and sent a myriad of musings my way. First was the response from your anonymous friend when you started the “Konkere” debacle, where he kept harping on price slashing as a way of clipping struggling rivals. Followed by the parties whose interests this particular development will serve.

    Hopefully, this will go a long way for many Nigerians positively… Provided that 2015 Vals day expiry quip is not real though.

  5. ‘…where 2 or 3 Nigerian businessmen are gathered, a cabal is soon formed.’

    I’d actually say it is the same globally. Only difference with Nigeria is we don’t have any anti trust or collusion laws to discourage such.

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