President of the Hungarian Competition Authority: If prices jump from six hundred forints to two thousand overnight, action is needed

English2021. aug. 18.Dániel Kovács

The complaints received by the Hungarian Competition Authority (GVH) suggest that there are major disturbances in the building materials market, and that it is not only cartelization that poses a threat - Balázs Rigó, President of the GVH told Növekedé and also explained why the situation in the market resembles the Wild West.

You said recently that the situation in the domestic building materials market resembles the Wild West. Did you mean we had to be prepared for a fight if we want to buy paving stones for example? 

Not exactly that, but customers complain that they feel completely helpless.

When they go to buy building materials they don’t get a price list; building material prices are not transparent. Prices are set daily, sometimes only for half a day.

Buyers ask for a quote, but during the few couple of days it takes the order to arrive and be delivered the price will change.

Sellers can put customers in a situation that is almost like blackmail: they tell them the new price, and the buyers have very little time to decide whether to accept the higher price, or else the goods will be delivered to another buyer. If the delivered goods happen to be damaged, the buyer has no chance to have them replaced; customer complaints are not being managed appropriately. 

It also happens that the seller makes it clear that they prefer to be paid in cash, while all retailers have their online cash registers connected to the tax authority

and the government has been working for years on whitening the economy. So what is the reason for preferring cash? This is why I said that the situation was like in the Wild West.

In a normally functioning market economy, traders should be competing for customers and not the other way around.

However, there’s a well-known explanation for this, claiming that it is all because of the coronavirus, and that the price of timber has gone up so high here because American traders are buying up timber in Europe. 

In a market economy, imbalances can occur - when there is increasing demand for a product for example and the supply cannot keep pace with it. This does drive the prices up, but normally these effects eventually level off.

It is a fact that the pandemic has hit certain sectors really hard, and there are products the prices of which are being driven up by global factors.

At the same time, if we look into Eurostat reports and compare building material prices in the member states of the European Union in the last five years, we can see that the average price growth was ten to fifteen percent in most countries, except for Hungary and Romania, where it was thirty percent.

What do you think is happening? 

Complaints received by the GVH suggest that there are major disturbances in the building materials market. In order to find out what lies behind this, we recently set up a task force to examine complaints and reports from the market about suspected cartel practices.

We also consulted with ÉVOSZ and started examining all products for which the price increase was dramatic. Thus, the Competition Authority can start investigating suspected infringements in the construction industry as quickly as possible, such as whether large companies follow anti-competition practices between them. 

Have you found such infringements yet? 

We have found suspicious cases and we are about to launch proceedings to prove these and also give traders the opportunity to prove their good faith. However, it may also turn out that the competition law has been violated. 

And if no cartel practices are found, will you have to start from scratch?

I would not say so, because it is not just cartels that constitute competition infringements. Large companies can also abuse their economic dominance. This is not just typical of the construction industry; it is worth noting that  recently a great number of proceedings have been launched by the competition authorities of the EU member states and by the European Commission itself against big tech companies. 

The French competition authority recently imposed a huge fine on one American company. These cases are all about the authorities investigating and penalizing the abuse of dominant position as a prohibited market conduct.

But we can’t say that everything is OK in a certain market if we do not have proof of infringement. The market can also function poorly if its structure is not healthy: in the case of an oligopolistic market, for example - where two or three large players influence the processes - smaller companies are practically unable to succeed; they are in a vulnerable position.

Speaking about the market being distorted, we can say the same about domestic building material manufacturers. 

There are raw materials that are produced by several Hungarian companies.

But there are also products for which it is true that 80 to 85 percent of the annual output is produced by one single owner or mine operator.

And if this is the case, then this player can obviously influence the Hungarian market with production volumes, prices, or export volumes. If we see that the price of, say, six hundred forints per cubic metre will suddenly rise to two thousand, then we will obviously aim at creating a market where equal parties are competing.

Moreover, precisely because of the processes mentioned before, there is no hope for the market to correct itself in the near future and building material prices to start falling rapidly. So the interventions are justified. 

Why did this distorted market develop in Hungary?

In my opinion, this can be traced back to privatization. The government’s offer at the time was that in exchange for know-how, Western companies received guaranteed profits, unfortunately along with vital infrastructure and raw materials. The main aim of foreign owners is to maximize their profits.

Would it be helpful if the share of Hungarian raw material producers increased? 

It would, obviously, as we would not need so many imports. It would reduce our exposure if there were more Hungarian-owned factories. Competition would also increase if, instead of a bad structure, a healthier market structure developed with more competitors competing on a level playing field.

It is no coincidence that the GVH, which has relatively few powers, has been granted a more efficient means to detect market distortions.

Have you discovered cases in the building materials market lately in which you had to intervene? 

Just recently, there was a merger announcement about a French wholesaler intending to acquire a Hungarian wholesaler that deals with electrical installation materials.

The GVH, acting within its control powers, decided that it would not issue the certificate within eight days, but would initiate competition proceedings, in which first it would examine in more detail what the impact of this acquisition would be on the market.