Cement Industry Price Dynamics in Iran

Client: Cement Investment and Development Company

Authors/Consultants: Ghaffarzadegan N, Tajrishi AT

The project was conducted from September 2005 to May 2006 for the Cement Investment and Development Company (CIDCO). CIDCO is a major cement company that holds around a 12% share of Iran’s market and owns six major factories in Iran. During the time that the project was conducted, the cement price was fixed and was under the control of the government, but the government was considering a transition to a market economy and leaving the price up to the market. The cement industry was supportive of a quick transition to a market economy, while other stakeholders in the market were either skeptical or negative about it. However, CIDCO’s managers were concerned about price dynamics after leaving the price up to the market, as a price overshoot was not desired and could result in (1) complaints from consumers, or (2) wrong signals to producers, resulting in an inefficient capacity development and long-term inefficiency in the industry. There was also a concern that a price overshoot and possible social complaints might impose upon the government the need to take a returning action to the old fixed-price policy. Therefore, they were interested in learning about price dynamics during the transition process to a market economy. It was also important for them to consider the results of the model in their next negotiations with the government, as well as their own production planning and marketing strategies.

Data collection proceeded through examining archival data, previous reports, and semi-structured interviews with eight important players in the market. Then, building on the commodity model literature in system dynamics, we developed a cement price model. The model was calibrated to Iran’s economy, and the previous price trends were successfully replicated by the model. Then the model was used to predict price trends for the after-transition period, and it predicted a large overshoot pattern. Finally, conducting several experiments with the model, a combination of actions that results in a smoother transition was suggested. The lessons from the model were communicated to different stakeholders in the country and proved helpful and insightful. The final policy that was implemented by the government was consistent with several suggestions of the model and resulted in a successful, smooth transition to a market economy in this industry.

More information on this case can be found in Navid Ghaffarzadegan, Amir T. Tajrishi. 2010. Economic Transition Management in a Commodity Market: The Case of the Iranian Cement Industry, System Dynamics Review 26(2): 139–161.

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