VZCZCXRO4723
RR RUEHGR
DE RUEHKG #1286/01 1801303
ZNR UUUUU ZZH
R 291303Z JUN 06
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 3118
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHUB/USINT HAVANA 0057
RUEHSJ/AMEMBASSY SAN JOSE 1828

UNCLAS SECTION 01 OF 03 KINGSTON 001286 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EIND JM
SUBJECT:  CEMENT CRISIS TRIGGERS SHOCKWAVES IN JAMAICA 
 
REF: KINGSTON 555 
 
¶1. Summary: An ongoing cement shortage has caused immense social and 
economic fallout, with potential negative implications for Prime 
Minister Portia Simpson Miller's fledgling administration.  In 2004, 
despite strong opposition from interest groups, the GOJ yielded to 
pressure from the Caribbean Cement Company, Limited (CCCL) to raise 
the duty on imported cement to approximately 40 percent (15 percent 
is CARICOM's Common External Tariff (CET), with an additional 25.83 
percent "safeguard").  By late 2005, however, CCCL faced quality and 
production difficulties (reftel) which hampered construction 
projects and stalled economic growth.  In response, the GOJ 
announced a three-month waiver of the safeguard.  Cement importers 
were reluctant to respond to this incentive due to the short 
timeframe, so to alleviate the crisis, the GOJ removed both the 
safeguard and the CET for a period of one year.  Industry sources 
told emboffs that supply should normalize by July, but the GOJ will 
face strong resistance in attempting to re-implement the tariff when 
the one year waiver expires.  End summary. 
 
---------- 
Background 
---------- 
 
¶2. Caribbean Cement Company, Limited (CCCL) is a subsidiary of 
Trinidad Cement, Limited (TCL), and is currently the only domestic 
source of cement in Jamaica.  Facing stiff competition from cement 
importers, CCCL complained in 2003 to the Anti-Dumping and Subsidies 
Commission (ADSC) that its viability was being threatened and argued 
for protection.  Interest groups - led by the Incorporated Master 
Builders Association of Jamaica (IMBAJ) - vigorously opposed the 
request.  In a meeting on May 30, IMBAJ President Michael Archer 
told emboffs that CCCL used a proposed USD 100 million expansion 
project to influence the GOJ to increase the duty regime to protect 
the company. 
 
¶3. The GOJ mandated the ADSC to carry out an investigation under the 
Safeguard Act to study the industry and to recommend a new tariff 
regime.  By December 2003, the ADSC found that cement had been 
imported in such increased volume as to cause injury to CCCL.  It 
recommended a provisional safeguard measure in the amount of 25.83 
percent to remedy or prevent serious injury, as well as to allow 
CCCL the time to complete its upgrade in order to achieve 
international competitiveness.  Despite opposing submissions from 
IMBAJ, among others, the ADSC reconfirmed its findings and 
recommendations in July 2004.  The GOJ therefore applied the 
increased 25.83 percent tariff rate on top of CARICOM's 15 percent 
Common External Tariff (CET) in November 2004, for a period of four 
years. 
 
------------------------------- 
Cracks Appear At Cement Company 
------------------------------- 
 
¶4. By November 2005, buoyant demand to support a booming 
construction sector, as well as quality and production difficulties, 
precipitated a major shortage of cement to the local market 
(reftel).  CCCL initially blamed the shortage on strike action and 
torrential rain, but by February it was forced to recall 500 tons of 
faulty cement and halted delivery.  The company then admitted that a 
breakdown in its quality control system was responsible for the 
delivery of sub-standard product.  When CCCL realized its quality 
assurance system had failed it decided to import from its parent 
company, TCL.  However, increased local and regional demand meant 
that TCL could not supply its Jamaican subsidiary.  This forced CCCL 
to look outside CARICOM, but ironically the high tariff rate made 
this economically undesirable.  The company therefore agreed with 
importers that a tariff review was necessary to ease the shortage. 

----------------------- 
Shortages Shock Economy 
----------------------- 
 
¶5.  The cement shortage shocked the Jamaican economy, with real GDP 
for January to March 2006 growing by only 1.4 percent due in part to 
a 6.3 percent decline in construction output, a far cry from the 
seven percent growth recorded in 2005.  With less than two-thirds of 
daily demand being met, a number of construction projects have been 
temporarily suspended.  Archer said 80 percent of the country's 
limited supply is going to foreign and GOJ projects, a disturbing 
situation for local investors, who think the system is stacked 
against them.  "There is a view that the incentive structure is 
skewed against locals", Archer stated.  There is anecdotal evidence 
of bankrupt contractors due to cost overruns and missed deadlines. 
Between 25 and 30 percent of Jamaica's 107,000 construction workers 
are now unemployed, he continued.  With the construction sector 
closely linked to the retail sector, many businesses are recording 
steep declines in sales. 
 
¶6.  For some retail outlets the impact has been two-fold: in 
addition to losing revenues from cement sales the shortage has also 
hurt the sale of complementary items.  Chairman of Grace Kennedy and 
Hardware and Lumber (H&L) Douglas Orane told emboffs on June 5 that 
his company was receiving only 30,000 bags of cement per month, down 
from 65,000.  To combat falling sales and profitability, Orane asked 
the CEO of TCL Rollin Bertram to make up the difference from his 
plant in Trinidad, but Bertram declined.  This prompted Orane to 
question the efficacy of the Caribbean Single Market (CSM), but when 
asked to expand, Orane backtracked, suggesting the crisis did not 
signal a failure of the CSM, but a failure of TCL.  However, he said 
it was a sign of CSM weakness if a regional conglomerate favors its 
home market in a time of crisis. 
 
----------------- 
GOJ Slow To React 
----------------- 
 
¶7. With supplies drying up and public pressure mounting, Minister of 
Industry, Technology, Energy and Commerce (MITEC), Phillip Paulwell, 
eventually intervened in late 2005, directing the Jamaica Trade 
Board to monitor supplies at CCCL to ensure that demand was being 
met.  However, it was not until February that the Trade Board 
confirmed that CCCL was not meeting domestic demand and recommended 
GOJ intervention.  Paulwell responded by initially reducing the duty 
to the CET of 15 percent for six months, but with importers 
unwilling to risk returning to the market on such a short-term 
basis, the supply problems intensified.  There were increased calls, 
even among his People's National Party (PNP) supporters, for the 
resignation of Paulwell, who has a history of costly policy 
blunders.  Facing the biggest test of her fledging administration, 
but wanting to support her closest parliamentary ally, 
Simpson-Miller announced a full waiver of the tariff for one year, 
while stoutly supporting her embattled Minister. 
 
¶8. On June 1 emboffs met with Permanent Secretary for MITEC, Jean 
Dixon, and her team to get the GOJ's perspective on the crisis. 
Dixon stated that there were both supply and quality issues at play, 
but she preferred to await a report commissioned by the Ministry. 
(Note: Unconfirmed reports are that the investigating team has cited 
CCCL for dereliction of duty and has recommended that the company 
face the full penalties under the law. End note.).  She noted that a 
shortage of cement on the world market and high regional demand also 
affected the ability of the country to emerge from the crisis. 
Dixon reported that one investor has equipment in Jamaica to set up 
a new plant and another was contemplating the investment.  When 
asked about the implications the crisis has for the smooth 
operations of the CSM, Dixon suggested that the experience can only 
help to shape the process going forward and teach policy makers how 
to avoid errors in the future. 
 
--------------------------------------------- ------- 
Crisis Threatens Fifth Term, But Supplies Trickle In 
--------------------------------------------- ------- 
 
¶9. Despite her overwhelming popularity, the cement debacle is 
turning into a nightmare for Simpson-Miller.  With general elections 
looming, supporters of the PNP are worried the crisis could hurt the 
party's chances of winning a fifth consecutive term.  Poll results 
suggest that Simpson-Miller's popularity, while still high, is 
slipping, no doubt due in part to the immense social and economic 
fallout from the crisis.  Her unwavering support for Paulwell has 
not helped her cause, even among colleagues.  They are upset that 
Paulwell remains so influential in the handling of an issue which 
has caused many grassroots supporters to lose their livelihood. 
This has not escaped the attention of the opposition Jamaica Labor 
Party (JLP), which has used the opportunity to pressure the 
embattled Minister to resign.  The usually conservative Jamaica 
Gleaner newspaper launched a scathing attack on Paulwell for his 
history of costly policy mistakes.  IMBAJ's Archer said his members 
discussed street protests, but that he managed to dissuade them.  He 
said any re-imposition of the duty, however, would be "politically 
explosive" and "could bring the administration to its knees." 
 
 
¶10.  While supplies have begun to trickle in, things are far from 
returning to normality.  At the end of May CCCL received 80,000 bags 
of cement from Venezuela and most local hardware and retail 
merchants were able to receive supplies for the first time in weeks. 
 On June 23, 200,000 tons of cement finally arrived from Cuba, after 
being plagued by transportation logistics problems and poor weather. 
 Paulwell noted that the ship, once unloaded, will immediately 
return to Cuba to deliver another shipment.  While daily demand is 
still unsatisfied, there has been an easing of the crisis at the 
retail level, with some smaller projects resuming.  According to 
Orane, the sector should return to normal by the middle of July, 
when there could be a glut, creating a different set of problems. 
 
 
------- 
Comment 
------- 
 
¶11. The cement crisis was not unexpected given submissions presented 
to the ADSC during the investigations.  However, it was evident from 
the outset that the GOJ, searching for success stories, was bent on 
protecting CCCL in exchange for the proposed USD 100 investment. 
Ironically the policy decision has come back to haunt the Simpson 
Miller government and the lost output and associated costs could end 
up costing the country multiples of the proposed investment.  The 
reactionary approach to the crisis also suggest that the GOJ did not 
anticipate the potential impact of the shortages, despite being 
forewarned about the possibility of CCCL not being able to meet the 
expected hike in demand.  While Simpson-Miller has lost some support 
for her handling of the crisis, her political capital remains high. 
The real test will therefore arise when the administration is faced 
with the choice of re-imposing the tariff to appease CCCL or 
extending it to ward off political and possibly economic fallout. 
Already, Archer is warning of the possibility of street protests if 
the tariff is re-imposed.  Archer said the protests could be as big 
as the 1979 gas riots which brought the then-PNP administration to 
its knees.  This could provide the perfect platform for the JLP to 
exploit.  End comment. 
 
JOHNSON