14556512 critical analysis of pakistan cement industry

8/6/2019 14556512 Critical Analysis of Pakistan Cement Industry

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http://www.scribd.com/doc/40547184/Final-Report- Cement-

Industry-Pakistan
http://www.scribd.com/doc/40547184/Final-Report-Cement-Industry-Pakistanhttp://www.scribd.com/doc/40547184/Final-Report-Cement-Industry-Pakistanhttp://www.scribd.com/doc/40547184/Final-Report-Cement-Industry-Pakistanhttp://www.scribd.com/doc/40547184/Final-Report-Cement-Industry-Pakistan


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PAKISTAN CEMENT

INDUSTRYArmy Public College of ManagementSciencesAPCOMS

Group Members:

Mr. Tanseer AliMr. Ali Abbas

Group Name: BRIGHT STARS

Submitted To: Mr. Numair Ahmad

Submission Date: 13-01-2009


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TABLE OF CONTENTS

Page No.

Acknowledgement 1

Abstract 2

Past of Cement Industry of Pakistan

Overview 3

Growth Pattern of Cement Industry of Pakistan 6

Contribution to National Economy by Cement Sector 7

What Is Going in Related Sector 8

Government Attitude toward Sector 9

Financial Analysis of Four Companies 10

Major Economical Changes 15

Present of Cement Industry of Pakistan

SWOT Analysis

17

Major Contribution in Economical Growth of Pakistan 22

Major Decisions in Budget 2008-2009 25

Effect on Sector Due to Changes in Interest Rate 26

International Trend 26

Future of Cement Industry of Pakistan

Industry Future 29

Future Course of action for Cement Industry and Government 30

Concluding SWOT analysis 31

International Trend 32

Strength of Sector which Attract Investors 33

Resources condition of the sector 34

Current Duty Rate & Subsidies Provided By Government 36

References 37


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Acknowledgement

We wish to thank Al-Mighty Allah, who enabled us to successfully research and pen

this project,

Special thanks to Mr. Numair, project in charge for his continual support and

guidance enabling us to be on the right track.

Extra special thanks to Mr. Khurrum Mehmood who rendered his support throughout

this project for proof reading, formatting and information gathering. Lastly, we

would like to appreciate the patience of our parents and family members for

bearing up with us throughout this activity both time and money wise


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Abstract:

Review of literature is on the overall setup and performance of Pakistans Cement

Industry. Review depicts past and present practices employed by cement

manufacturers and support rendered by the Government.

Efforts are made to cover most of the issues having impact on the economy mostly on

macro level. Influences on balance of payments, GDP share etc are addressed in

present as well as future predictions are made. SWOT analysis of the sector is

conducted for better understanding of the strategies employed by the sector. Financial

information of various manufactures is quoted where appropriate to support theresearch and recommendations.

While doing the project we gather the data on following points of Pakistan Cement

Industry.

Past

Financial statements of any four companies from same sector

Growth pattern

Govt attitude toward sector

What is going on related sector

Share in import & export (share in balance of payment)

Major economical changes (2003 onward)

Present

SWOT analysis

International trend of sector

Contribution of sector in economic growth of Pakistan (employment, export, tax)

Major decision about sector in budget 2008-2009

Effect on sector due to change in interest rate

Help or affect on sector due to change in related sector

Future

Future course of action for govt and industry

International situation of that sector

Current duties rate and subsidy provided by govt

Conclusion of SWOT analysis (logical conclusion)

Resources condition of that sector. Raw material, labor skilled, unskilled), Overhead

(electricity, gas)

What are strength of sector that can attract foreign investor


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CEMENT INDUSTRY OF PAKISTAN

Overview:At the time of independence in 1947, only one or two units were producing

grey cement in the country. During the decade of 1948-58, the number ofcement units increased to six. During the Ayub era the economy started togrow and the construction activities underwent a boom. To meet the growingdemand of cement new units were set up. During the decade of 1958-68, thenumber of cement units increased from 6 to 9. During the following period ofZulfiqar Ali Bhutto all the industrial units, including cement industry, werenationalized, therefore, no new unit was set up during 1971-77. During theperiod of General Zia-ul-Haq, 1977-88, denationalization of industrial unitsboosted the investments. Housing and construction industries picked up andthe demand for cement increased. Thus, the number of cement unitsincreased from 9 to 23 and finally 24.The cement industry in Pakistan has become a long way since independencewhen country had less than half a million tones per annum productioncapacity. By now it has exceeded 10 million tones per annum as a result ofestablishment of new manufacturing facilities and expansion by existing units.Privatization and effective price decontrol in 1991-92 heralded a new era inwhich the industry has reached a level where surplus production after meetinglocal demand is expected in 1997.

The cement industry is needed a highly important segment of industrial sectorthat plays a pivotal role in the socio-economic development. Through the

cement industry in Pakistan has witnessed its lows and high in recent past, ithas recovered during the last couple of years and is buoyant once again.

There are total number of units are 23, from which 4 units are in the publicsector while the remaining 19 units are owned by the private sector. Two ofthe four units in the public sector had to close down their operations due tostiff competition and heavy cost of production. The cement plants are locatedin every province of Pakistan.

The province-wise distribution of cement plant is as under.


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Providence Units Capacity (MillionTons)

Punjab 8 7.488Sindh 8 3.851

NWFP 6 4.945Baluchistan 1 0.758Total 23 17.040

Three additional cement plants with installed capacity of over 2.1 million tonsare in the final stage of completion despite the available excess capacity inthis sector. The following table shows installation of new cement factories andexpansion of the existing facilities during the current decade.

The industry is divided into two broad regions, the northern region and the

southern region. The northern region has over 87 percent share in total


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cement dispatches while the units based in the southern region contributes 13

percent to the annual cement sales.

Name of company New/ Expansion Year of Commission New CapacityCreated(Tons)

Northern RegionAskari cement Expansion 1964 945,000

Askari cement New 1996 630,000Bestway cement New 1988 1,039,500

D.G Khan cement Expansion 1988 1,039,500

Fauji cement New 1997 945,000

Lucky cement New 1996 1,260,000

Maple Leaf

cement

Expansion 1998 1,039,500

Pioneer cement New 1994 630,000Sub-Total 7,528,500

Southern Region

Essa cement Expansion 1988 315,000

Total 7,843,500


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Growth Pattern of Cement Industry of Pakistan

Cement is one of major industries of Pakistan. Pakistan is rich in cement rawmaterial. Currently many cement plant are operating in private sector. The lastfew years have been a golden period for cement manufacturers, when the

government increased spending on infrastructure development. Highcommercial activity and rising demand for housing on account of higher percapita income has kept cement off take growth in double digits.

During the financial year-07, cement sales registered a growth of 31 percent

to 17.53 million tonnes as against 13.5 million tonnes sold last year. The

cement sales during July-February-08 showed an increase,

both in domestic and regional markets to 18.17 million

tonnes. The domestic sales registered an increase of 7.2

percent to 14.4 million tonnes in the current period as

compared to 13.5 million tonnes last year whereas exports

stood at 3.7 million tonnes as against 1.8 million tonnes inthe corresponding period last year, showing an increase of

110 percent.

Pakistan cement industry has a huge potential for export of cement toneighboring countries like India, U.A.E, Afghanistan, Iraq and Russian states.These has been a robust growth of cement demand seen both in domesticand exports market during the fiscal year ended June 30, 2007. The industryachieved an overall growth of 32% with domestic demand of cementincreased by 24.95% where as exports increased by 111.86%. The overallgrowth achieved by cement factories for the year under review was 111.29%

consisting of domestic and exports markets at 71.02% and 335.12%respectively.


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Pakistan cement industry has been successful to capture export markets ofvarious GCC and African countries, which are new markets for the countryother then conventional export market of Afghanistan and Iraq.

Contribution to National Economy by Cement Sector

The cement is contributing Rs 30 billion to the national exchequer in the form

of tax. This sector has invested about Rs 100 billion in capacity expansion

over the last four years. There are four foreign companies, three armed force

companies and 16 private companies listed in the stock exchanges. The

industry is divided into two broad regions. The northern region has over 87%

share in total cement dispatches while the units base in the southern region

contributes 13% to the annual cement sale. The per capita consumption of

cement has risen from 117 kg in FY06 to 131 kg in FY07.

The cement industry of Pakistan entered the export markets a few years back,

and has established its reputation as a good quality product. The latest

information is that India will import more cement from Pakistan. So far

130,000 tones cement has been exported to the neighboring country.

What Is Going in Related Sector:Pakistan has one of the highest population growth rates in the world, touching3%. This has prompted a sizable demand for housing facilities in the country.


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According to estimates of construction industry, there is a huge backlog ofabout 6.25 million housing units in the country. Bulk of the current demand of0.6 million units needed every year is for urban areas. With greaterurbanization the demand for cement is expected to grow at an average ofnearly 7% per annum..

The demand for cement for infrastructure units is expected to grow with thecommencement of work on motorways, power plants, and Islamabad NewCity, Karachi Package and Ghazi Brotha dam. If all these projects areimplemented as per schedule, the demand for cement is expected to grow ata higher rate.

The construction sector in Pakistan has played an important role in providingjobs and revival of economy. It provides jobs to about 7 per cent of the totalemployed labor force or to 2.5 million persons, during 1999-2000. There is alot of scope for importing latest technological advancements / hi-tech building

materials. Construction equipment & plants with the latest practices adoptedin the developed Countries after varied Research & development are badlyneeded to be adopted by Pakistan as well. Quality Control & Materials TestingLaboratories & Equipment are need of the time. There is unlimited scope forinvestment in this sector.

Globally, construction and engineering services industry is regarded as one ofthe largest fragmented industry accounting for 10-12% of GDP in manycountries. Benefiting from both public and private investments, theconstruction industry is a prime source of employment generation offering jobopportunities to millions of unskilled, semi-skilled and skilled work force. Thetotal world spending on construction amounted to US$3.2 trillion in 1998.

The main factors behind increase in demand of cement were: 60 percent

higher Public Sector Development Projects (PSDP) allocation, seven percent

GDP growth, increasing number of real estate development projects for

commercial and residential use, developing export market and expected

construction of mega dams. The operating capacity of cement in FY05 and

FY06 was 18 million and 21million tonnes, which rose to 37 million tonnes by

the end of FY07.

Moreover, this rising trend is expected to be short-lived due to higher interestrates and inflationary concerns are likely to make it disadvantageous for

investors to enter the construction industry. In addition to this, to control real

estate prices the government is considering imposing a tax on it.

Government Attitude toward SectorTax structure


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2. Fauji Cement


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Fauji cement

3. Pioneer Cement


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Pioneer cement ratio chart:


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4. DG Khan Cement


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DG KHAN Profit Ratio:


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.00%

.00%

10.00%

15.00%

20.00%

5.00%

0.00%

ati

Fauji Cement

PioneerCement

DG Khan

Net Profit After Tax Ratio 2007:

Name Of Company Profit Ratio

Lucky Cement 20.34%

Fauji Cement 18.66%

Pioneer Cement 3.0%

DG Khan Cement 25.27%


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Major Economical Changes1. 2003-2004: There was decline in the production during the FY03-FY04.

The sharp fluctuations in cement prices and relatively lesser demand

for cement have been responsible for the decline in the cement

production.

2. 2004-2005: At the end of 2004, there were 21 cement companies listed

with KSE. The cement industry was one of the best performing sectors

in the stock market. Its market capitalization increased from Rs 65.1

billion on June 2004 to Rs 75.5 billion in March 31, 2005. Recording a

growth of Rs 16.0 percent.

3. 2005-2006: The cement industry in the country has shown significant

growth. The rise in construction activity is equally shared by the private

construction sector and Public Sector Development Program (PSDP).

The total production of cement was recorded at 12.2 million tonesduring the FY05-FY06 compared with 11.2 million tones in FY04-FY05;

a growth of 9.75% was recorded. The boost during the period (July-

March) 2005-06 in the performance of the cement industry activity is

because of the high level of construction activity in the country and

increased development expenditure by the Government. Due to an

enormous increase in demand of cement in recent years almost all of

the cement units working in Pakistan are on the path to future

expansions. Due to huge demand the retail price of cement was reach

on Rs. 430/ bag.4. 2006-2007: Cement demands strong correlation with the GDP growth

rate and 7% GDP growth in FY07. During the FY07, cement sales

registered a growth of 31% to 17.53 million tones versus 13.35 million

tons sold in the corresponding period of last year. Local sales grew up

by 26 5 and reached at 15.38 million tons, while exports increased

massively by around 85%. The retail price of cement was decreased by

Rs. 430 to Rs. 315/ bag during the FY07.


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SWOT ANALYSIS:

Strengths:

1. Availability of Raw Material.

2. Imported Machinery and plants in most of companies, which providebetter quality to over all process.

3. During fiscal year 2007-08, country exports stood at 7.712 million tones($435 million) and Pakistan has already established its position as anexporter of cement and clinker in the region, Sources said the industryprojections suggested that the cement industry exports would reach to$735 million by the end of 2008-09 and it would touch $1.043 billion bythe end of 2009-10.

4. Availability of foreign investment and loans has also played an

important role in softening the demand for bank credit. The moderationin fixed investment demand in cement, construction and textile is more

of a reflection of the fact that these industries had already expanded

their capacities in recent years and floatation of debt instruments (e.g.,

chemical, cement, real estate and ship yard) in the domestic market

cement, real estate and ship yard) in the domestic market

5. The compressive strength is a very important factor of cement. The

Portland cement achieves its maximum strength in 28 days. The

Pakistan standard PSS 232-1883 (R) & British Standard BS 12: 1978

provides for 28 days strength of 5000Psi and 5950Psi respectively formortar cubes.

6. Cement industries in Pakistan are currently operating at their maximum

capacity due to the boom in commercial and industrial construction

within Pakistan.

7. Effect of GDP:

Following effects of GDP will govern the growth of cement industry in

Pakistan:

Higher GDP growth has positive impact on cement demand

Cement demand growth rate was double the GDP growth rate inlast three years

GDP growth is expected to continue to have same positiveimpact on demand growth


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8. Housing demand to grow:

Following indications have showed a considerable demand ofcement in Pakistan:

Housing projects consume roughly 40% of cement demand

Currently 0.3mn houses are built annually against demand of0.5mn

Low interest rates, post 9/11 remittances inflow, and realestate boom have helped housing sector

growth

Easy mortgage availability and announcement of low costhousing schemes will determine housing sector growth in thelong-run.

9. Governments development spending shall continue to rise dueto:

Government development expenditures count for one third oftotal cement consumption

Increase in development expenditures has helped cementdemand to grow at very high rates

Increase in PSDP- as announced in Medium TermDevelopment Framework 2005-10 - will help cement demandto grow in the country

Infrastructure development in a region triggers privatedevelopment projects having even positive impact on cementdemand


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10.Pakistan cement industry is one the largest exporter in Asia, major

markets are of Afghanistan and Iraq will be after peace. Its increased

GDP by exports, providing cements in Large Dams Project and

earthquake rehabilitations projects.

11.Laboratory testing facilities meeting all American and European

standards and Vertical cement grinding mills.

12.Cement industry called major Performance Blue Chip in current

economic survey 2007-08 because during the first three quarters of the

fiscal year 2007-08, the combined paid-up capital of ten big companies

was Rs. 91 billion, which constituted 13.17 percent of the total listed

capital at KSE in which Fauji Fertilizer, DG Khan Cement, Lucky

Cement played major role.

13.Today, we find a relatively better scenario as compare to past. Most ofthe cement plants, that used to operate on furnace oil, have now been

converted into coal system, which has substantially reduced cost of

production.

14.The most modern selection of production equipment possible in every

major department of the plant.

Weaknesses:1. The stage of industrial development, in most of the segments, is still at

a very low level of technology and the existing industrial base is very


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narrow and consists of very basic industries such as cement, sugar,textile, cigarette, edible oil, fertilizer, soda ash, caustic soda, PVC etc.

2. Since cement is a specialized product, requiring sophisticatedinfrastructure and production location. So, most of the cementindustries in Pakistan are located near/within mountainous regions thatare rich in clay, iron and mineral capacity. Structure of Cement industryin Pakistan is as such that there is not much substitutability to buyers.Which shows that the Cross elasticity of demand is negligible.

3. The customer has no choice at all to switch between two brands ofcement due to cartel of all of the cement manufacturers in Pakistan.

4. The freight charges are a massive 20% of the retail prices. The plantslocated very close to each other and tapping the same market will haveto expand their markets which will increase their freight expenses.Dandot, Pioneer, Maple Leaf and Garibwal are all located within aradius of 100 kilometers and are selling bulk of their production in thesame areas and will thus face serious competition from each other.

5. Consumers face a tough decision with regards to prefer which brandover which because of the similar pricing of cement industry. Theformation of cartel by the cement manufacturers have exploited localconsumers a lot and this has led to the concentrated degree ofoligopoly, where the firms are acting as a single unit to perform theirmonopoly. Their combined market power is simply a diluted version ofthe dominance that a single firm with a monopoly market share canexert.

Threads:1. Unanticipated increase in interest rates or less than expected demand

growth might create severe crises for the sector couple of years

forward

2. Lack of demand or depressed demand in future will prove to be lethal

for the sector that has just started to recover from the miseries of 90s.

Lack of demand forced cement units to operate at very low capacity

utilization in nineties. There was a fierce competition among cementmanufacturers.

3. A price war was witnessed which ended up with no conqueror. Similar

apprehensions exist for the future when there will be plenty of excess

capacity. Any hurdle in the growth of cement demand may force the

sector into the price war. Yet, we expect cement manufacturers to act

prudent and learn lesson from the history. Any mistake, similar to the

one made in the last decade, will again coerce the sector into the era

where all are losers with no winner.


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4. Main component of the cost is fuel. Pakistan's cement industry hasconverted their plants to coal considering it to be the cheapest fuel, butits price in international markets has gone up by more than 300 percent in the last one year, which directly relate increasing the cost ofproduction.

5. The demand of cement falls heavily during rainy weather in thecountry, which directly affects the running cost of a unit. It is only therising levels of cement exports, which are sustaining the industry.

6. Instead of appreciating the marketing skills of cement entrepreneurs toexplore new markets for cement, the industry is being pressurizedconstantly without realizing that any reduction in cement exports fromPakistan will not only deprive the country of foreign exchange ($2billion this year), but will also result in losses to the industry.

7. The burden of increased input costs has to be borne by the consumers.It is only the government, which can provide relief to the consumers bycutting down or abolishing the central excise duty.

8. Problems of oversupply situation:

Following problems might arise with the oversupply situation in cementindustry:

Lower capacity utilization will reduce benefits of economiesof scale. High leverage will also adversely affect profitabilityof new plants.

New plants will gain market share at the cost of older

players, which are not undergoing expansion. Large idlecapacity is will create panic in players and this may result inprice wars in the coming years.

9. IMF Package in Future can cause to decrease GDP and economicaldevelopment in Pakistan. Which will also be cause to stopdevelopment of infrastructure. So it will have huge effect on cementindustry also.

Opportunities: 1. The local cement industry faces high upfront fuel costs. In order to

facilitate their conversion to coal, which is widely available in the

country, the government has given incentives for imported plant and

equipment for coal firing units.

2. The demand of Pakistani cement is expected to continue to grow at the

rate of 20 per cent for about four years to come. It may then follow

traditional growth rate of seven per cent per year. Announcement of

major dams will dramatically increase this demand.

3. Deregulation after accession of Pakistan to WTO is expected to openthe window of competition from cheaper markets. There may be no


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tariff after this deregulation on import of cement allowing its entry into

Pakistan from cheaper market at lower rate. Cement from cheaper

markets may also block Pakistans export of cement to its neighboring

countries. Global market has vigorously taken up the advantage of

economy of scales and multinational giants now control more than 40per cent of world production (China not included). The recent

acquisition of Chakwal Cement by an Egyptian giant, Orascom may be

a beginning of such an entry in Pakistan by multinationals. New

avenues for export of cement are opening up for the indigenous

industry as Sri Lanka has recently shown interest to import 30,000 tons

cement from Pakistan every month. If the industry is able for avail the

opportunity offered, it may secure a significant share of Sri Lanka

market by supplying 360,000 tons of cement annually.


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MAJOR CONTRIBUTION IN ECONOMIC GROWTH OFPAKISTAN:Cement demands strong correlation with the GDP growth rate and 7% GDPgrowth in FY07. During the FY07, cement sales registered a growth of 31% to

17.53 million tones versus 13.35 million tons sold in the corresponding periodof last year. Local sales grew up by 26 5 and reached at 15.38 million tons,while exports increased massively by around 85%. The retail price of cementwas decreased by Rs. 430 to Rs. 315/ bag during the FY07.

During the last three years the large-scale manufacturing sector is showingsigns of moderating along with a subsequent slowing down of the economyand has registered a growth of 4.8 percent during the current fiscal year.

The main contributors to this growth of 4.8 percent in July-March 2007-08over last year are pharmaceuticals (30.7 percent), wood products (21.9percent), engineering products (19.5 percent), food & beverages (11.1

percent), petroleum products (6.03 percent) and chemicals (3.1 percent).Individual items displaying positive growth are: cotton cloth (4.8 percent) andcotton yarn (3.3 percent) in the textile group; cooking oil (1.1 percent), sugar(33.9 percent) and cement (17.9 percent).

Production of Selected Industrial Items of Large-Scale (Source: Federal Bureau ofStatistics)

Item UNITS 2005-06 2006-07

JULY-MARCH

%CHANGE2006-07 2007-08

Cotton

Yarn

000 tonnes 2546.5 2845.2 2132.6 2203.5 3.32

Cotton

Cloth

Mln.Sq.Mtr 903.8 977.8 727.9 763.4 4.88

Sugar 000 tonns 2960.0 3525.9 3247.6 4351.2 33.9

Cement 000 tonns 18564 22739 16448 194014 17.95

Cement At the end of 2007, there were 21 cement companies listed with theKSE. During the period under review, the performance of cement sectorremained lackluster. Share index of cement declined by 17.8 percent duringJuly-April 2007- 08. Its market capitalization also declined by 0.2 percent inthe outgoing fiscal year. 2007 was a year of cement industry expansions. As aresult, supply has been enhanced, but depreciation and financial chargeshave increased. A high interest rate scenario has made the situationchallenging for this highly leveraged sector.

During the first three quarters of the fiscal year 2007-08, the combined paid-up capital of ten big companies was Rs. 91 billion, which constituted 13.17

percent of the total listed capital at KSE in which Fauji Fertilizer, DG KhanCement, Lucky Cement played major role.


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Direct and Indirect Taxes Rs. 23.50 Billion

Value of Fixed Assets Deployed Rs. 85.21 Billion

Loans from Financial Institutions Rs. 79.53 Billion

Shareholders Equity Rs. 80.00 Billion

Employment (Direct & Indirect) 3%

SHARE IN ECONOMIC GROWTH BY TAXATION

The cement sector is contributing Rs 30 billion to the national exchequer in

the form of taxes. This sector has invested about Rs 100 billion in capacity

expansion over the last four years. There are four foreign companies, three

armed forces companies and 16 private companies listed in the stockexchanges. The industry is divided into two broad regions, the northern region

and the southern region. The northern region has over 87 percent share in

total cement dispatches while the units based in the southern region

contributes 13 percent to the annual cement sales

SHARE IN ECONOMIC GROWTH BY EXPORTS:

In recent years, the Cement Industry of Pakistan has witnessed anunprecedented growth of 32% year-to-year basis. Industry has an installed

Cement production of about 37 million tons per annum, over strippingdomestic demand. The surplus Cement has an encouraging export marketdemand from neighbouring countries like India and Afghanistan and there isgreat potential to export the surplus cement to the Middle East. Realizing therapid development in the construction industry


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2008-2009

Mon |----------Cement----------| Clinker Mon |----------Cement----------| Clinker Total

Afghan IndiaOther(Sea) (Sea) Afghanis India

Other(Sea) (Sea)

July 221,028 -194,7

3925,

330 July268,33

454,

300384,2

10106,

159813,0

02

Aug 265,620 -

260,4

88

49,

402 Aug

262,96

8

59,

498

370,8

40

93,

888

787,1

94

Sept 257,354 11,316226,1

5853,

804 Sep219,20

275,

221457,3

07145,

198896,9

28

Oct 192,774 37,557194,7

1135,

455 Oct238,33

637,

567509,4

69214,

8941,000,2

66

Nov 257,598 47,363176,7

3884,

955 Nov275,41

067,

534506,5

55115,

387964,8

86

Total 1,194,374 96,2361,052,8

34248,

946 Total1,264,25

0294,

1202,228,3

81675,

5254,462,2

75

Growth-% 5.85%

205.62% 111.66%

171.35% 72.13%

SHARE IN ECONOMIC GROWTH BY EMPLOYEEMEN:

As expansion cycle of Pakistan cement industry grew day by day due to few

barrier of entry in market, higher profitability ratio, and governmentprivatizations. So we have many cement manufacturers which generate moreand more of employment possibilities. Today cement industry is contributing3% of total employment. That is huge no of employees working as engineers,managers, masons, supervisors, etc.

MAJOR DECISIONS IN Budget 2008-2009

1. Federal excise duty on cement has been raised to Rs 900 per Tonnefrom the existing base of Rs 750 per tonne.

2. The Finance Bill seeks to extend exemption on ready mix concreteblocks. Previously, building blocks of cement were only exemptedunder this Schedule.

3. Despite the fact that cement constitutes as one of the basic necessitiesfor shelter, the policy makers have subjected the cement sector to the

highest taxation in the region. The levy of General Sales Tax (GST) oncement is Rs660 per ton in Pakistan as compared to Rs320 in India. itis said that Pakistan has one of the highest tax rates on cement in theAsian region. The impact of such tax and duty structure has resulted inalmost 40 per cent increase in the cement price per 50 kg bag whencompared to India suppressing demand for Pakistan cement.


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EFFECT ON SECTOR DUE TO CHANGE IN

INTEREST RATE:

The cement industry in Pakistan had secured loans of Rs75 billion for

increasing its production capacity from 38 million ton to 49 million ton by 2011.Increased in interest rate can be caused of shortage of bank credits,consumer financing and loan has shrink. As interest rate touched sky-highlevels in late nineties, which increased the burden of financial charges onrelatively highly leveraged cement sector. State Bank discount rate was ashigh as 13% in 1998-1999. Currently, SBP discount rate stands at 9%,although we expect a rising trend in the rates in the coming year but we donot anticipate interest rates to soar as high as they were in late nineties. Ourlong-term stance on interest rates is stable. By 2006, when cement units, ingeneral, have start interest payments by 2006, a stable debt service scenariooccurs. However, substantial cash outflows in the form of financial charges

are likely to cause decline in available cash for payouts.Unanticipated increase in interest rates or less than expected demand growthmight create severe crises for the sector couple of years forward

International Trend:Global ScenarioDuring the year 2004 worlds cement production has increased by 2.56% by50 million tons and consumption increased by 3% as compared to previousyear. World demand for cement is forecast to increase 5 percent per yearthrough 2008.Cement Industry - Regional ReviewChinaChina is the largest producer and consumer of cement, having 850 million tonproduction capacity and consumed 36 percent of total worlds production.From 2000 to 2004, the cement industry showed an average annual growth of9 %. In 2004, the total output of cement in China increased by 12.5 % from2003. The industry has benefited from the growth in real estate and the rapidgrowth of the national economy. It is anticipated that Chinese cement industrywill grow by 5% till 2008, owing to boom in construction activity, and willaccount for 44% of global demand in 2008. The demand for cement isexpected to continue to grow as China implements its strategies of developing

the western regions, reinvigorating the traditional industrial bases in northeastChina, its urbanization drive, its projects for transportation of natural gas, andprojects related to the 2008 Beijing Olympics and the 2010 Shanghai WorldExpo.IndiaWith the total installed capacity 163 million tons in 2005 India is the secondlargest producer of cement in the world accounting for approximately 6% ofthe global production.. Actual cement production in 2003-04 was 123.50million tons as against a production of 116.35 million tons in 2002-03, which isan increase of 6.15% over 2002-03. Cement production during the year 2004-05 (April-January, 2004-05) was 108.06 million tons (provisional), registering

a growth of 7.10%. The cement production is on an up move becausegovernment has increased spending on infrastructure and huge investments


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are flowing in the road and the power sectors. Other sectors like ports andairports will also see rise in investments over the next 6 to 12 months.Demand in the housing sector and the revival in the capex cycle are furtherdriving the demand for cement. Production target of 133 million tons has beenset for the year 2004-05 and industry is expected to grow at the rate of 10%

per annum and it is expected to add capacity of 40-52 million tons, mainlythrough expansion of existing plants.IranIrans current production capacity stands at 32 million tons, and it is expectedthat capacity will rise to more than70 million tons by 2010. During the currentyear three plants are expected to come online and capacity will reach up to 37million tons at the end of the year. Current boom in housing sector and overallinfrastructure activity in the country, Iran is consuming most of its productionwithin the country. However after completion of its ongoing expansion in 2010,it would be able to export the commodity in the region. Iran stands 14th interms of cement production, while 12th and 15th in terms of consumption and

export of the commodity respectively. Further due to ample availability of rawmaterial and fuel Iran has most economical rates of the commodity in theworld.

Export Outlook

During FY05, cement export stood at 1.6 million tons, representing 40%growth as compared to last corresponding year (154% increase in 2003-04).Growth in cement export remained slow down during FY05 owing to the factthat superfluous domestic demand has surpassed supply as most of the localcement manufacturers were operating at 100% capacity and still werent ableto meet present demand. Presently some of the cement companies areexporting cement to Afghanistan, Iraq and UAE only to maintain theirpresence in these markets. After completion of major expansion plans inPakistan in 2007, there would be a surplus to export in these marketshowever in the same period Iran would also be able to approach vigorouslythese markets as its most of the cement plant will start to come online. At that juncture there would be extreme competition between both countries tocapture these markets, especially the war-ravaged countries (Iraq andAfghanistan). Iran would get benefit in terms of price as cement prices in Iranis among the cheapest in the world as the price of cement in Iran remained

between $20-$25 per ton. On the other hand it is expected that being the USally, Pakistan would get most of the favor in order to keep its market share inthese markets given the fact that all the construction activities in Iraq andAfghanistan would be taken by US. Despite the fact that cement constitutesas one of the basic necessities for shelter, the policy makers have subjectedthe cement sector to the highest taxation in the region. The levy of GeneralSales Tax (GST) on cement is Rs660 per ton in Pakistan as compared toRs320 in India. In the light of this tax regime, it is said that Pakistan has oneof the highest tax rates on cement in the Asian region. The impact of such taxand duty structure has resulted in almost 40 per cent increase in the cementprice per 50 kg bag when compared to India suppressing demand for

Pakistan cement.


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Worlds Cement Production (Qty = 000 tones)

Countries 2001 2002 2003 2004 2005

United

States

90,450 91,300 92,600 99,000 99,100

Brazil 39,500 39,500 40,000 38,000 39,000

China 626,500 705,000 750,000 934,000 1,000,000

Egypt 24,500 23,000 26000 28,000 27,000

France 19,839 20,000 20000 21,000 20,000

Germany 28,034 30,000 28000 32,000 32,000

India 100,000 100,000 110,000 125,000 130,000

Indonesia 31,100 33,000 34,0000 36,000 37,000

Iran 26,650 30,000 31,000 30,000 32,000

Italy 39,804 40,000 40,000 38,000 38,000

Japan 76,550 71,800 72,000 67,400 66,000

Korea 52,012 55,500 56,000 53,900 50,000

Mexico 29,966 31,100 31,500 35,000 36,000

Pakistan 9,876 9,985 11,410 13,344 17,112Russia 35,100 37,700 40,000 43,000 45,000

Saudi Arabia 20,608 21,000 23,000 23,000 24,000

Spain 40,512 42,500 40,000 46,800 48,000

Thailand 27,913 31,700 35,000 35,600 40,000

Turkey 30,120 32,600 33,000 38,000 38,000

Others 351,014 350,015 348,590 367,656 374,888

World total 1,700,000 1800,000 1,860,000 2,130,000 2,220,000


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Industry Future:The cement demand would increase in future due to Government policies as

the Pakistan Peoples Partys (PPPs) slogan has always been roti, kapra

aur makan (bread, clothing and housing). In this regard a statement of thenew government confirmed that it would encourage industries and construct

small dams. Pakistan's economy, PACRA said grew impressively during last

five years with an average GDP growth rate of around 7%. Cement industry

has a positive correlation with the GDP growth rate. The major domestic

demand drivers are public sector development programs (infrastructure), real

estate and industrial construction.

But on other hand there are many factors, which can create many problems inPakistan cement industry. According to the analysts of Pakistan Credit RatingAgency (PACRA) the cement sector is currently facing stern challengesemanating from a wide spectrum of socio-economic risks including contractingeconomic activities, and high input costs. These negative developments,along with the prevailing credit crunch and rising interest rates, have furtherconstrained the industry's prospects.

The conducive economic environment not only fuelled the local demand butalso provided impetus for capacity expansion. Resultantly, the industry addedsignificant capacity recently, while several new production lines are scheduledto commence operations shortly. During this period, the cementmanufacturers also established export operations by catering to the growingdemand of regional economies. This, while stabilizing the local cement prices,

had a positive impact on capacity utilization and margins. Although the localdemand dwindled significantly in the first quarter of FY 09 (around 15%decline), strong growth in exports has provided support to the industry in theform of largely sustained capacity utilization and price stability. However,given the global recession, export demand is expected to come down.

This would negatively impact the margins and put pressure on local pricesthat could lead to a price war among producers. The looming supply overhangscenario in the sector could potentially worsen the situation. Profitability of thesector has come under pressure due to high energy cost (comprising around50% of total raw material costs) and increasing financial expenses.

Keeping these developments in view, the outlook on the sector is negative

which implies that PACRA perceives downward pressure on the ratings within

the industry, especially for high leveraged entities. PACRA, as part of its on

going surveillance, is monitoring all developments very closely, and may take

a client specific rating action wherever it is deemed appropriate. However, the

cost and exports may be affected due to weakness of the US dollar causing

coal, electricity charges and freight prices, comprising 65 to 70 percent of the

cost. The PSDP allocation has been cut by Rs 75 billion and feared further

cuts would curtail cement demand. Major capacities of countries like India and


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Iran are expected to come online by FY10 and onwards which are likely to

convert these countries from dependent importers to potential exporters.

Moreover, this rising trend is expected to be short-lived due to higher interestrates and inflationary concerns are likely to make it disadvantageous for

investors to enter the construction industry. In addition to this, to control realestate prices the government is considering imposing a tax on it.

Future Course of action for Cement Industry

and Government:

Related governmental regulations:The policy of the Government is to keep a balance between rapid economicdevelopment, on the one hand, and social justice and consumers protection,on the other. There is a traditional conflict between these two aims. It is,therefore, necessary to regulate trade, commerce or industry in the interest offree competition therein. The Ordinance was promulgated to provide formeasures against un-due concentration of economic power, growth of un-reasonable monopoly power and un-reasonably restrictive trade practices.

Thus cement industry too is monitored and answerable to rules and

regulations developed by the monopoly control authority of Pakistan. Thegovernment is considering allowing further concessions and additional


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incentives for cement export, with a view to increase overall export volume.These measures will immensely help in promoting and protecting highinvestments made in cement sector in recent years. In the wake of its hugesurplus production as a result of massive capacity expansion undertaken itrather seems imperative for Pakistani cement industry, on one hand, to

sustain existing export markets and, on the other, explore new markets.1. Govt. Should improve law & order to support export

2. Ban likely to be place on cement import

3. No changes in cement import and export policy.

4. Crisis: country faces energy crisis, another weekly holiday under-study.

5. Short-term measures:

Duty drawback

Port charges

6. Medium term measures:

Abolishing of / reduction in centralexcise duty

7. Long term measures:

Infrastructure at port.

8. Pakistan could save about $70 million on the import of furnace oil perannum. This would result in a low price per bag of cement and would

ultimately encourage domestic demand for cement.

9. A comparative study regarding taxes on cement indicates that asagainst Pakistan where the taxes on cement are 37 per cent, it is nil inIran, 7 per cent in Thailand, 10 per cent in Egypt, 10 per cent inPhilippines, 10 per cent in Indonesia and 18 per cent in India.

Concluding SWOT analysis:

We would like to conclude this report by ranking overall sector as Neutral. We

remain neutral on the sector because on hand expansion is the need of hour. Due to

expected growth in demand, current capacity appears inadequate. On the other hand,

expansion plans set up by the various players of cement sector to grab demand

expansion might cause sector to overflow. Along with risk of being oversupplied,

unanticipated increase in interest rates or less than expected demand growth might


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create severe crises for the sector couple of years forward. Weighing risks and

rewards, we remain NEUTRAL on the sector.

To break-up cement manufacturers cartel the Competition Commission of Pakistan

raided offices of Association of Cement Manufacturers of Pakistan and confiscated

official record. The association condemned this action and said it is against business

norms. They accused Commission for blaming cement manufacturers for making a

cartel for the last 10 years but could not able to prove it. The capital structure of

cement companies may change, as most of the expansions during last two to three

years have been debt financed and companies are expected to retire these debts

rapidly during next three to five years. Moreover, the slow down in economy may

occur due to political uncertainty, which might result in reducing cement demand in

future.

However, in case of construction of hydro-powered dams, there will be a sudden jump

in the local sales of those companies located near these dams.

Consolidation is needed for industry stability because of following observations.

1. Cartels are unstable by their nature.

2. Industry needs one or two dominant players for long-term sustainability in

prices and profits

3. Top four players command 35% of market share in the industry that will be

increased to 46% in FY08.

4. World norm is that top four players have more than 60% market share

5. Consolidation process will be needed to increase market share of larger

players rather than going for capacity expansions

6. We may see acquisitions in the industry as the industry goes through

overcapacity cycle.


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International Trend:

Although international energy prices have declined recently, any beneficialimpact on margins has largely been negated by substantial depreciation of

Pak Rupee. PACRA, therefore, believes that the performance of cementcompanies could weaken further impacting their financial profile. Pakistan'scement industry is poised to face a tough challenge as the regional markets,mainly China and India, are likely to emerge as competitors in the exportmarket, following a slowdown in their domestic economies and enhancedproduction capacity.

Competitions in export markets:

With regards to the competition in export markets, we have observedfollowing behaviors of cement industry in Pakistan:

1. Cement exports started in FY02 to Afghanistan that is still a majormarket

2. Iraqi market can become a potential target after peace is restored

3. India and Iran are the major competitors for Pakistan in the MiddleEastern region

4. Upcoming capacity expansions in Iran and other GCC countries willcreate tough competition for Pakistan.

5. Export prices are presently touching USD 75/ton in the exports market,however they are likely to come down as new capacities comes online

Strength Of Sector Which Attract Investors:Pakistan provides relatively strong protection for foreign investors, it ranks19th worldwide on protecting investors, according to World Bank reportDoing Business In South Asia 2008.

It attract in many ways:

Availability Of Raw Material:Abundance of natural resources makes it an ideal place to set-up cement

plants. And which can give high turnover to foreign companies in cementindustry.

Duty Free Port of Gwadar:Pakistan was previously relying on its Karachi port for the shipment of itsimports and exports. It was over crowded and expensive. Pakistan has built anew deap sea port at Gwadar in the strategically imporant Province ofBalochistan bordering with Iran. This port has been declared duty free, on topof this cheaper labour makes it the cheapest port in the whole South Asiaregion.


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Cement Mill Packers, Crushers, Packers)

Civil Engineers Loaders

The companies in cement sector takes their people as one ofits most valuable assets they view their human resource as acompetitive advantage therefore they ensure that theiremployees only those people that are self motivated andprofessionally qualified. They also take into consideration thattheir business goals are realized through such diverse workforce providing equal opportunities without any discriminationon the basis of cast, creed, gender and religion

Land:

The land that has the factories and used for accommodation is owned by

most of companies. There is enough space to accommodate new plants if theneed arises.


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Current Duty Rate & Subsidies Provided By Government:

The Cement industry in Pakistan has to pay Federal Excise duty at

Rs.950/ton as compared with Rs. 750 / ton, 16% sales Tax as compared with

15% and high utilities bills like electricity, gas etc

On top of all the issues is the harassment of the industry by different

government departments, industry sources said. They said that Pakistan

Standard Control Authority had filed criminal cases against the cement

manufacturers.

The Competitive Commission of Pakistan is also chasing the industry,

accusing it of forming cartel and initiated cases against a number of units,

sources said.

The adverse impact of slow exports of cement to India started to emerge in

December 2008 as lesser orders have been received by exporters.

In the first quarter of 2008-09, a spokesman for All Pakistan Cement

Manufactures Association (APCMA) remarked that any setback to cement

industry may increase the price to as high as Rs. 1600/- approx per bag.

Price to manufacture one bag of cement has risen to Rs. 375.60 / bag in 2008

from Rs. 228.21 / bag in 2007. Electricity has risen by 20%.

Ministry of Science and Technology has levied an additional tax factor at 0.1%

of ex factory price which amounts to Rs. 3 per bag


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References:

1. www.cement.com.pk

2. Economic Survey Of Pakistan 2005-06

3. Economic Survey Of Pakistan 2006-07

4. Annual Report Of Lucky Cement 2006-07

5. Annual Report Of Lucky Cement 2007-08

6. Annual Report Of Fauji Cement 2007-08

7. Annual Report Of D.G Khan Cement 2007-08

8. Annual Report Of Pioneer Cement 2007-08

9. Budget Review 2008-09

10. www.cementchina.net

11.Research Report Of Cement Sector Focusing On Lucky CementBy M. Faisal Panawala.

12. www.researchandmarkets.com/reports/

13. www.finance.isixsigma.com/library/content/c050601a.asp

14. www.dawnnews.com.pk

15. www.expressnews.com.pk

16. www.finance.gov.pk

17. www.fccl.com.pk
http://www.cement.com.pk/http://www.cementchina.net/http://www.researchandmarkets.com/reports/http://www.finance.isixsigma.com/library/content/c050601a.asphttp://www.dawnnews.com.pk/http://www.expressnews.com.pk/http://www.finance.gov.pk/http://www.fccl.com.pk/http://www.cement.com.pk/http://www.cementchina.net/http://www.researchandmarkets.com/reports/http://www.finance.isixsigma.com/library/content/c050601a.asphttp://www.dawnnews.com.pk/http://www.expressnews.com.pk/http://www.finance.gov.pk/http://www.fccl.com.pk/

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