Cement Industry Pakistan

Strategic Analysis 2007

Author: Sadaf Fayyaz

ABSTRACT

The paper focused on cement industry of Pakistan. It answered questions like industry

attractiveness, competitive forces, SWOT analysis, industry environment and other industry

traits or features. The project discussed history, current scenario and future growth of the

industry. The role of government and certain issues like per capita consumption of cement in

Pakistan, sector profitability, growth chances, Oligopolistic competition among cement firms, are

discussed. The productive capacity, dependence on suppliers, and foreign investment in cement

sector is also discussed.

TABLE OF CONTENTS

CHAPTER 1 CEMENT INDUSTRY PAKISTAN

1.1 HISTORY 1

1.2 CEMENT SECTOR IN NINETIES 2

1.3 CEMENT SECTOR ROLE IN ECONOMY 3

1.4 PAKISTAN: STRATEGIC LOCATION 4

1.5 CEMENT SECTOR: CURRENT SCENARIO 5

1.5.1 AN OVERVIEW 5

1.5.2 CURRENT PROBLEMS 6

CHAPTER 2 INDUSTRY ANALYSIS

2.1 INDUSTRY SWOT ANALYSIS 8

2.2 THE MAJOR PLAYERS 9

2.3 THE BASIC FEATURES OF CEMENT INDUSTRY PAKISTAN 11

2.4 CEMENT INDUSTRY PAKISTAN ENVIRONMENT 16

2.5 MAIN CONSUMER (BUYER) OF CEMENT SECTOR 16

2.6 FORCES TO CHANGE INDUSTRY 17

2.6.1 GOVERNMENT PRESSURE 17

2.6.2 PRICES OF COAL 17

2.6.3 TAXES ON CEMENT 17

2.6.4 CONCRETE ROADS 17

2.7 TYPES OF CEMENT 18

2.7.1 WET PROCESS 18

2.7.2 SEMI-WET PROCESS 18

2.7.3 DRY PROCESS 18

2.8 MAJOR TECHNOLOGY SHIFT 18

CHAPTER 3 FDI, COMPETIVE EDGE AN D 5 FORECES ANALYSIS

3.1 KEY FACTORS FOR COMPETITIVE EDGE 20

3.2 FOREIGN INVESTMENT 20

3.3 PRICE MONOPOLY 21

3.4 MICHEAL PORTER’S 5 FORCES 22

3.4.1 NEW ENTRANTS 22

3.4.2 BUYERS 22

3.4.3 SUPPLIERS 22

3.4.4 SUBSTITUTES 23

CHAPTER 4 FUTURE, GROWTH POTENTIAL AND INDUSTRY ATTRACTIVENESS

4.1 CEMENT SECTOR FUTURE FORECAST 24

4.2 THE LONG-TERM DOMESTIC GROWTH SCENARIO 24

4.3 SUPPLY SIDE OF THE PICTURE 25

4.4 PAKISTAN ENTRY INTO WORLD CEMENT MARKET 26

4.5 FUTURE 27

4.6 IMPACT ON BUDGET

4.7 SOME RECOMMENDATIONS 29

4.7.1 GOVERNMENT PRESSURE 29

4.7.2 EXCISE DUTY 29

4.7.3 EARNING FOREX 30

4.7.4 SEEK DEMAND/SUPPLY FORCES 30

REFERENCES

1 CEMENT INDUSTRY PAKISTAN

1.1 HISTORY

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 of cement units increased to six. During the

Ayub era the economy started to grow and the construction activities underwent a boom. To

meet the growing demand of cement new units were set up. During the decade of 1958-68, the

number of cement units increased from 6 to 9. During the following period of Zulfiqar Ali

Bhutto all the industrial units, including cement industry, were nationalized, therefore, no new

unit was set up during 1971-77. During the period of General Zia-ul-Haq, 1977-88,

denationalization of industrial units boosted the investments. Housing and construction industries

picked up and the demand for cement increased. Thus, the number of cement units increased

from 9 to 23 and finally 24.

Pakistan’s cement sector has come a long way. At Partition, in 1947, Pakistan had only five

cement plants (one of which was in East Pakistan) having a total annual capacity of 650,000

tons. Demand at that time was estimated at over a million tons. In the 50’s five new cement

plants were set up with a total capacity of 3.3m tons. Four more plants – Maple Leaf, Javedan,

Gharibwal and Mustehkam were set up in the 60’s. By 1969, Pakistan’s cement industry had an

annual rated capacity of 2.8m tons. Indeed, the Ayub era was a good time for cement — there

was growing demand and new cement plants were set up to meet this demand. Then the first

blow to the industry came. Under the Economic Reforms Order of 1972 all private sector cement

plants were nationalized and merged with state owned plants to form the State Cement

Corporation of Pakistan (SCCP). This heralded the start of the ‘State Cement Era’ (1972-92).

Total production just before nationalization had touched 3.5m tons. By the end of this era in

1992, it had increased to just 8.4m tons. By 1977, Pakistan, a country rich in all the raw materials

required for cement, had to start importing. This would continue until 1995.

Between 1977and 88, government policy shifted towards denationalization and emphasis on

housing and construction. To meet the demand, in the 80s, seven units with a total capacity of

2.54m tons were allowed by the government to be set up in the private sector and four plants

were set up by the SCCP in the public sector. The private sector plants were Cherat (1985),

Pakland (1985), Attock (1986), DhadaBhoy (1988), Essa (1988), Anwarzeb White Cement

(1988) and FECTO (1989). The public sector plants were Thatta (1983), Dandot (1983), Kohat

(1983) and D.G. Khan (1985). By the end of this period, there were a total of 24 cement plants in

the country. But it was not an easy time for private sector plants. Their prices had to compete

with prices fixed by the SCCP, which were on the lower side. In 1992, the State Cement Era

came to an end with the privatizations of eight cement plants: Maple Leaf, Pak Cement, White

Cement, DG Khan, Dandot, Gharibwal, Zeal Pak and Kohat. Other privatizations would follow

between 1986 and 2000. Today, out of the 24 existing cement units, only two remain in the

public sector – Mustehkam in the north and Javedan in the south. Twenty-two are in the private

sector and 21 are listed on the Karachi Stock Exchange.

1.2 CEMENT SECTOR IN NINETIES

During the early nineties there was an acute shortage of cement in the country, particularly in the

north. Demand could not keep pace with supply and Pakistan was forced to continue importing

cement. Importing cement is an expensive affair. Since it is a heavy commodity, freight and

transport charges are often exorbitant. Due to the shortage coupled with high cost of imports,

cement prices in the early 90s were high. But demand for cement was growing rapidly (at an

average of 8% a year). The economy also looked as if it was heading towards a high growth

phase. There was some foreign investment coming in, significant infrastructure development

projects were predicted, many Independent Power Producers were cropping up and the

population continued to grow unabated. The GDP growth rate was estimated at 6.5% and

population growth at 3.2%. Therefore, it looked as though there would be an ever-increasing

demand for cement. Because it was felt that the economy would grow significantly and there

would be a high demand for cement, many of the existing plants — Cherat, D.G Khan, Maple

Leaf, Pakland, DhadaBhoy, AC Wah and Kohat — significantly expanded their capacities. Five

new plants were also set up in the private sector during the mid-nineties to meet expected future

demand: Pioneer (1994), Lucky (1996), Askari (1997), Fauji (1997) and Bestway (1998).

Because demand was higher in the north, these five new cement plants were all set up in what

the All Pakistan Cement Manufacturers Association (APCMA) calls the ‘North Zone’. Pakistan’s

cement sector was; therefore, ready to supply the demand that was predicted.

1.3 CEMENT SECTOR ROLE IN ECONOMY

Cement industry has been playing a pivotal role in the socio- economic development of the

country. The industry is contributing around Rs. 30 billion per annum to the national exchequer

in the shape of Excise Duty and other taxes and is also adding around Rs. 100 billion to the GDP

of the country each year. The industry has been offering direct / indirect employment

opportunities to more than one lakh people. Total investment in the cement industry currently

exceeds Rs. 160 billion and is likely to go further up to Rs. 200 billion by 2010. Unfortunately

despite unprecedented growth in demand of cement, the industry is currently not able to generate

adequate margins due to low level of prices of cement.

1.4 PAKISTAN: STRATEGIC LOCATION

Pakistan holds a key strategic location in South Asia and shares a border with India in the East,

Afghanistan and Iran in the West, China in the North and the Arabian Sea in the South. The

country stretches over an area of 803 940 km2 and is divided into four provinces or states: Sind,

Balochistan, Punjab and North-West Frontier. The population is 151 million. There are 22

cement plants with an annual capacity of approximately 18.55 million t. The majority of the

plants are located in the North and South of the country mainly because of the proximity to raw

materials and markets.

They tend to use the latest dry process technology. Until recently demand was in the vicinity of

11 million t against a capacity of 18 million t but things have changed very recently. Capacity in

the North is 13.63 million t compared with the South where it is 4.92 million t.

There are almost 22+ cement factories operating in Pakistan. Most of them are listed public or

private companies on Karachi Stock Exchange. The cement industry reflects a boom trend for

the year 2007-2008. The cement sector showed slight decline on KSE due to emergency news

and political instability in Pakistan. The telecom and banking sector showed marginal

performance after cement sector.

1.5 CEMENT SECTOR: CURRENT SCENARIO

1.5.1 AN OVERVIEW

After a long period, when the cement sector remained moribund, Pakistan IS witnessing,

somewhat of resurgence in the last two years. This industry which rapidly expanded its

production capacity during the first half of the 1990s faced serious problems of capacity

utilization from 1995 owing to the poor rate of GDP growth in Pakistan’s economy. From 1995-

2000 demand growth in the cement sector was way off its historical growth rate of 8% per

annum as a result of macro economic instability which set in after 1993.

Happily, the initiatives taken by President Pervez Musharraf and Mr. Shaukat Aziz during his

tenure as Finance Minister to address the structural problems in Pakistan’s economy have now

started to bear fruit. Macro economic stability has led to considerably reduced fiscal deficits

thereby making resources available for public spending again. During the last two years, the

Public Sector Development Program has been considerably enhanced and this has coincided with

greater demand for cement from the private sector largely for construction activities in the

Housing sector. Demand growth in the last two years has been approximately 20% YOY and for

the current fiscal year, the industry will achieve capacity utilization in excess of 90%. Demand

has also been buoyed by increasing quantities being exported to Afghanistan.

The present installed capacity in the country is around 18.5 million tons with 4.5 million tons in

the South Zone and 14 million tons in the North Zone. Encouraged by the impressive growth in

cement demand during the last 2 years, most cement manufacturers are expanding their

production capacity and some green field projects are also being undertaken. This sector is

poised for unprecedented expansion all of which will come into production in the next 3years.

The enhancement in capacity is likely to be of the order of some 24 million tons per annum

which will raise Pakistan’s annual installed capacity by the end of fiscal 2007-2008 to 42.5

million tons which will place the country in a respectable position with regard to its cement

consumption per capita.

However, it is imperative that the buoyant growth in domestic consumption by both the public

and private sectors, rebuilding efforts in Afghanistan and export of cement via the sea route

coincide, so as to absorb the enhanced production which will become available in both the North

and South Zones. All indications are that the rate of GDP will be accelerated even further in the

coming years which augur well for the industry. However, should for any un-foreseen reasons

demand growth falters, there could be a sharp reduction in capacity utilization which must be

avoided at all costs.

The cement industry was amongst the few bright spots in LSM sector during fiscal year 2006-07.

Production growth accelerated during the year, helped by the substantial capacity additions in

recent years, a booming domestic construction industry and strong export demand.

The capacity additions in the cement industry during FY07 meant that at end-June 2007 the

industry had excess capacity of about seven million tons. However, the industry’s prospects

remain strong due to (1) the strong potential for exports to India, which faces an acute shortage

for at least next two years; and (2) domestic demand is expected to increase in the backdrop of

increase in public sector development expenditure, as well as (3) continued strength in the

housing construction industry.

1.5.2 CURRENT PROBLEMS

Pakistan's Cement Industry consists of 25 cement units mostly producing Portland cement.

The present operative capacity is 18.37 million tons per annum but the industry merely operates

at 65% to 75% of its capacity. Out of the 25 cement units of the country, 16 units aggregating a

capacity of 14.9 million tons, representing 77% of the industry, have already converted to coal.

Remaining units are in various stages of conversion. In addition to this, 9 units are optimizing/

expanding their existing production facilities due to increase in cement demand from local

markets and from markets in Afghanistan and Middle East countries.

Due to non-availability of good quality indigenous coal, the industry has no option but to import

low sulphur coal from countries like Indonesia, China and South Africa. The rising prices of

imported coal has substantially reduced the estimated saving envisaged by the cement

manufacturers, on the basis of which the conversion process was implemented and investment of

millions of dollars was made by them. The prices of imported coal have shown significant rise

since June/July, 2003. A 100% increase in imported coal prices during last two years has

narrowed down the difference in cost of production by coal vs. furnace oil by around 55%.

2 INDUSTRY ANALYSIS

2.1 INDUSTRY SWOT ANALYSIS

STRENGTHS:

@ Productive efficiency

@ Less entry barriers

@ Availability of raw materials in abundance

@ Good automated and installation processes

WEAKNESSES:

@ Oligopolistic competition

@ No economies of scale, though global

cement industries have EOS

OPPORTUNITIES:

@ The strong potential for exports to India

@ Expected increase in domestic demand

@ Continued strength in the housing

construction industry

THREATS:

@ Indian rejection of Pakistani cement and

standardization

@ Chinese cement

@ Heavy dependence on cement bag supply

industry

@ Cement from cheaper markets may also

block Pakistan’s export of cement to its

neighboring countries.

Table 1: SWOT Analysis

2.2 THE MAJOR PLAYERS

@ Al Abbas Cement

@ Attock Cement

@ Bestway Cement

@ Cherat Cement

@ DhadaBhoy Cement

@ Dandot Cement

@ D G Khan Cement

@ Dewan Cement

@ Fauji Cement

@ Gharibwal Cement

@ Javedan Cement

@ Kohat Cement

@ Lucky Cement

@ Maple Leaf Cement

@ Mustehkam Cement

@ Pakistan Cement

@ Pioneer Cement

@ Zeal Pak Cement

PRODUCTION CAPACITY 2006 AND MARKET SHARE

Unit Capacity Market Share

* Askari Cement Wah 945,000 5.09%

* Askari Cement NZP 1,260,000 6.79%

* Best Way 1,039,500 5.60%

Cherat Cement 787,500 4.24%

* D G Khan Cement 1,732,500 9.33%

Dandot Cement 504,000 2.71%

* Fauji Cement 945,000 5.09%

Fecto Cement 630,000 3.39%

Gharibwal Cement 567,000 3.07%

Kohat cement 567,000 3.07%

* Lucky Cement 1,320,000 7.11%

* Maple Leaf Cement 1,534,050 8.26%

Mustehkam Cement 661,500 3.56%

Pioneer Cement 630,000 3.39%

Saadi Cement 567,000 3.05%

Zaman Cement 630,000 3.39%

Attock Cement 756,000 4.07%

DhadaBhoy Cement 530,000 2.85%

Essa Cement 472,500 2.54%

Javedan Cement 630,000 3.39%

Pakland Cement 787,500 4.24%

Pakistan Slag Cement 157,500 0.85%

Thatta Cement 315,000 1.70%

Zeal Pak Cement 360,000 1.94%

Table 2: Capacity & Market share

*The market leaders in terms of market share are highlighted.

2.3 THE BASIC FEATURES OF CEMENT INDUSTRY PAKISTAN

@ No Economies of Scale (In Pakistan)

@ Oligopolistic competition among firms

@ Attractive Mergers & Acquisitions

@ Strong demand and supply forces

@ Weak or no Substitutes for cement

@ Venture capitalist firms

@ Less entry barriers

@ Industry in boom

@ High growth chances

@ Little product differentiation

0

2000

4000

6000

8000

10000

12000

14000

No. of units and production

1 2 3 4 5

2001-2005

Cement Industry Pakistan

Figure 1: Cement Industry Pakistan

YEAR PERCENTAGE OF GROWTH RATE IN

CEMENT SECTOR

1999-2000 3.66

2000-2001 -3.33

2001-2002 1.40

2002-2003 1.62

2003-2004 12.11

2004-2005 15

Table 3: Source SBP

NAME Cap Upgraded Capacity Total Capacity

NORTH

Cherat

Cement

0.7

5

8000 0.2

4

0.99

Lucky

Cement

1.2

57

(2x4,200)+ (2x4,200) 5.0

4

6.297

D.G Khan

Cement

1.6

5

3,800+(1x6,700) 3.1

5

4.8

Bestway

Cement

0.9

9

1000+(1x6,000) 2.1 3.09

Fecto

Cement

0.6 1,000 0.3 0.9

Pioneer

Cement

0.8 (1x2,000) 0.6 1.4

Chakwal

Cement

(1x4,000) 1.2 1.2

Maple

Lead

1.4

61

(1x3,000) 0.9 2.361

Maple

Leaf white

500 0.1

5

0.15

Kohat

Cement

0.5

4

(1x3,800) 1.1

4

1.68

Kohat

White

Cement (1x500) 0.1

5

0.15

SOUTH

Attock

Cement

0.7

2

(1x3,000) 0.9 1.62

DhadaBho

y Cement

0.5

04

1,000 0.3 0.804

Gala Dari

Cement

(1x2,800) 0.8

4

0.84

Pak Land

Cement

0.7

5

1x2,500 0.7

5

1.5

Table 4: Source: www.brecorder.com

2.4 CEMENT INDUSTRY PAKISTAN ENVIRONMENT

There are currently 22+ players in the sector. Eighteen are listed on KSE. Some new (infant)

companies are also coming into existence. The rest are mature industries with developed markets

and customers. The total market capitalization of all the cement firms in Pakistan equals 92%.

The per capita consumption is lowest in Pakistan as compared to other countries.

Countries per capita cement consumpsion

12014099

202262

334

450

600603

0

100

200

300

400

500

600

700

Japan Thailand China Egypt US Phillipine India Indonesia Pakistan

In k

gs

Figure 2: Per capita cement consumption

2.5 MAIN CONSUMER (BUYER) OF CEMENT SECTOR

The main consumer of cement industry is the housing sector, consuming about sixty percent of

the total cement production. The housing sector is now booming as a part of the remittances is

being used for construction of houses, which has helped in increasing cement demand in the

country. Commercial banks, which are currently loaded with liquidity, are finding housing sector

to be a potential area for lending, after successful experiment in their Car Financing Schemes.

2.6 FORCES TO CHANGE INDUSTRY

2.6.1 GOVERNMENT PRESSURE

The undue pressure of the government to keep the prices lower than the prices of other countries

will prove to be counter productive for the economy. A price level of Rs. 260 per bag seems to

be a viable price for the industry although it will still be lower than the cement prices prevailing

in other countries.

2.6.2 PRICES OF COAL

Another factor which has affected the profitability of cement sector is a surge in prices of

imported coal. The C&F price of coal which used to be around US $40 per a few years back has

now gone up by 100% to over US $80 per ton. Fuel cost constituting around 30% of cost of

manufacturing cement has heavily impacted the cost of production of cement.

2.6.3 TAXES ON CEMENT

Cement is an item of basic necessity which is predominantly required for housing and

infrastructure. This is the reason that in most of the countries taxation on cement is either zero or

negligible. In Pakistan however, taxes on cement are the highest.

2.6.4 CONCRETE ROADS

FBR succeeded in enhancing the level of revenue for the government, it can consider gradually

switching over to concrete roads. Capital cost of concrete roads is higher, but maintenance cost is

almost zero. Further, as per study conducted in India there is a 12 per cent saving in fuel

consumption on plying vehicles on concrete roads. Substantial savings can be achieved by this

switchover

2.7 TYPES OF CEMENT

The industry is producing ordinary Portland cement, Slag Cement, Super Sulphate Resisting

Cement, Sulphate Resistant Cement and White Cement. There are three conventional processes

used in Pakistan to manufacture cement:

2.7.1 WET PROCESS

In view of the constraints of kiln dimension and large water requirements and extremely poor

heat efficiency, wet process has become obsolete.

2.7.2 SEMI-WET PROCESS

The process is suited for materials with sufficiently high plasticity. This process has also become

outdated due to high fuel/energy consumption.

2.7.3 DRY PROCESS

The dry process was formerly used where water and the raw materials were scarce. But now it is

the most popular process in the cement industry. The advantages are: (1) the fuel requirement is

about 800 Kcal per kg of clinker (which is about 40 percent less as compared to the wet process).

This process enables the processing of a water range of raw and the maintenance is easier. The

raw material is preheated and partially calcined resulting in higher kiln efficiency. The kiln being

shorter in length requires less space in erection and easier to maintain.

2.8 MAJOR TECHNOLOGY SHIFT

Until 1970, cement plants were installed on wet process or semi-dry technology while the plants

installed after 1980s are based on dry process. The dry process is at least 50 per cent more

energy efficient than the wet process. Presently, 85 per cent of the installed capacity is based on

the dry process. The Cement industry has benefited a lot by shifting towards dry process,

installation of electrostatic precipitators and pre-heaters, automation of processes and installation

of online analyzer, which has resulted in environmentally better and energy-efficient industries.

The production of cement is a highly energy-intensive process. Limestone, clay/shale and

gypsum are used as raw materials in the production process. The raw material for cement

manufacturing is available in abundance in Pakistan. As compared with twenty types of cements

produced elsewhere in the world, the cement industry in Pakistan produces four.

3 FDI, COMPETIVE EDGE AN D 5 FORECES ANALYSIS

3.1 KEY FACTORS FOR COMPETITIVE EDGE

@ Production capacity expansion

@ Technology

@ Location of plant ( near raw materials)

@ Certification of BIS quality standards (so that cement can be imported to countries)

@ Capability to meet domestic as well as foreign demand

@ Capability to export cement in vessels (could not be exported through road)

3.2 FOREIGN INVESTMENT

The first foreign investment in the Pakistan cement industry is Orascom Construction Industries

(OCI) acquisition of Chakwal Cement Company in March 2005. Subsequently, the Company

name was changed to Pakistan Cement Company (PCC). The state-of-the-art plant commenced

Commercial Operations in December 2006 with an annual cement production capacity of 2.5m

tons, thus becoming the largest production line in Pakistan.

PCC is proud of its product PAKCEM which is the leader on all quality scales. PAKCEM is the

first cement in Pakistan to comply with European Standards (EN 197) and also far exceeding

requirements of Pakistani Standard (PS 232).

Another remarkable change in the cement sector is going through. Cement sector attracted $41.4

million foreign investment during July-August this year, depicting a surge of 780 percent against

$4 4.7 million of same period of 2006-07. Cement industry is rapidly growing due to huge local

and international orders, as presently South East Asia region, Gulf counties and India are facing

huge shortage of cement due to tremendous development work. On the other hand Pakistani

cement sector is main beneficiary of the regional cement shortage, which is filling the shortage

gap by exporting cement to these countries, industry sources said. They said that improved

infrastructure, cheap labor and easy availability of raw material for cement making are some

chief reasons behind this increasing foreign investment.

According to SBP statistics, foreign investment in cement sector got a raise of $36.7 million

during July-August this year, as compared to same period of last year. The external demand for

cement from Gulf countries is growing. This has attracted foreign investors in the cement sector.

3.3 PRICE MONOPOLY

Cement prices in Pakistan have doubled than that of the product in India following the recent

price hike of the commodity on this side of the border. Indian cement manufacturers are

reportedly marketing their product at Rs145 to Rs150 per bag; which is almost 50 per cent less

than those in Pakistan, even after inculcating the ‘currency exchange factor’. 

The Monopoly Control Authority has taken serious notices of cartels in the cement industry

(hikes in cement prices), and decided to take action against the producers to protect the interests

of consumers.  Price Increase by Bestway Cement is 8.2 per cent from Rs245 per bag o Rs265

per bag. D G Khan Cement Company has increased cement price by 7.8 per cent from Rs255 per

bag to Rs275 per bag. Compared to them Maple Leaf has made an increase of four per cent from

Rs250 per bag to Rs260 per bag.

3.4 MICHEAL PORTER’S 5 FORCES

3.4.1 NEW ENTRANTS

There are no such entry barriers to enter the cement industry. New entrants can easily enter and

set their plants where raw material is easily available. Two new plants have been set up near

Chakwal.

3.4.2 BUYERS

The main consumer of cement industry is the housing sector, consuming about sixty percent of

the total cement production. The housing sector is now booming as a part of the remittances is

being used for construction of houses, which has helped in increasing cement demand in the

country. Commercial banks, which are currently loaded with liquidity, are finding housing sector

to be a potential area for lending, after successful experiment in their Car Financing Schemes.

Local cement manufacturers are exporting cement to Middle East and African countries and a

couple of months back, around a dozen companies have applied for Board of Indian Standards

(BIS) certification and two major cement manufacturing companies were formally allowed to

export cement to India.

3.4.3 SUPPLIERS

Packing material shortage to affect export to India. The cement export to India could be affected

by the shortage of plastic bags used for transporting the commodity. Two companies are

supplying the plastic bags to the cement industry for packing and transporting of cement, but

these companies are not meeting the demand of the cement industry.

These respective companies are producing around 16 million bags each of 50 Kg. However,

industry demands around 28 million bags, creating a shortage of 12 million bags. Currently,

cement companies are packing cement in a 50-Kg bag consisting of paper or plastic. Most of the

companies prefer paper bag to supply cement in local market, as it is cheaper and easily available

while the plastic bags are costly as well as short in supply. A paper bag costs around Rs. 6 to 8

while plastic bag costs around Rs. 12 to Rs. 13. It is the reason that cement in local markets sold

in paper bags, however according to Indian and International standards, the companies are bound

to export cement in plastic bags.

3.4.4 SUBSTITUTES

Gypsum plaster is a good substitute for cement. The planned manufacture of gypsum plaster,

agro-gypsum and plaster of Paris will be a great achievement in the sense that it will keep

cement prices in check. Gypsum plaster is a good substitute for cement for construction

purposes. Gypsum plaster is also useful in building construction in regions of extreme cold and

hot climate. Pakistan has 5-6 billion tons of gypsum deposits. According to initial estimates, the

first plant for manufacturing gypsum products will be established with an investment of around

Rs. 2.6 billion.

4 FUTURE, GROWTH POTENTIAL AND INDUSTRY ATTRACTIVENESS

4.1 CEMENT SECTOR FUTURE FORECAST

After a prolonged recession, the Pakistani economy is growing rapidly. Low interest rates, public

infrastructure spending and private project investment have led to a major expansion of the

construction sector. The cement industry, as result, has had two years of exceptional sales.

Currently, the demand for cement in Pakistan is growing at 18% per annum. Given that the mean

growth rate for the last four decades is just under 6%, the current rate is three times the historical

average. However, the past may not be a good predictor of the future. Financial sector reforms,

increase in worker remittances, higher government infrastructure spending, and fiscal incentives

for the housing sector will serve as catalysts for higher growth. Moreover, export to Afghanistan,

currently growing at 39%, is a relatively new and important source of revenue for the industry.

The strong demand for cement has clearly affected the bottom line of all cement companies and

encouraged the major players to expand to meet future demand. But what is a sustainable long-

term growth rate? And what is the demand-supply scenario going to look like in the future?

4.2 THE LONG-TERM DOMESTIC GROWTH SCENARIO

The correlation between GDP growth and demand for cement in Pakistan is weak. This has

probably more to do with the quality of data than the actual relationship. However, experience

from the Far East, suggests that cement consumption tends to grow at 1.5 to 2.5 times that of

GDP. Based on the upper limit of this empirical evidence, and the expected GDP growth rate of

7%, one could speculate that demand for cement should grow at close to 17.5% per annum. If

one believes that this is a sustainable growth rate, the picture for the next seven years is like:

0

10

20

30

40

50

Growth rate in % & demand in"000,000"

tons

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Years 2004-2012

Cement Growth Forecast

Figure 3: Forecasted growth rate

But there is a caveat to this story. First, while government may have aggressive development

plans for the future, it may be constrained in its spending if there is an economic shock, such as

another oil price hike. Second, land prices have doubled, if not tripled, over the last two years,

and this will have a significant impact on the purchasing power of the individual consumer –

though it is unlikely to affect high rise building projects to the same extent. Third, rising interest

rates and continuing inflationary pressure may impact GDP growth and constrain the borrowing

limit of consumers. Last, and perhaps most worrying, is the behavior of banks in the last couple

of years. Not only have they lent to the private sector at extremely aggressive rates, despite

repeated warnings from SBP, a number of them hold large PIB portfolios that, if marked to

market, may put these institutions in serious financial difficulties. A troubled financial sector can

easily lead to reversal of gains made in the economy so far.

4.3 SUPPLY SIDE OF THE PICTURE

It is well know that the Pakistani cement industry operates under a cartel. This arrangement was

put into place in 1998, when a majority of expansions planned in the mid-nineties came on-

stream just when the economy took a downturn. With no export markets to absorb the surplus

cement, companies were forced to cut production and enter into a marketing arrangement with

their competitors. With the economy back on track, the cement industry has enjoyed double digit

growth for the last three years. Today, the industry is operating at close to 90% of capacity. In

anticipation of a sustained economic recovery, a number of cement companies have either

booked orders for new plants or are expanding existing units. The additional capacities will start

coming on line from this year. The list of plants and there probable dates of production are given

in table 3. This list is by no means exhaustive. A number of companies are thought to be

planning expansions, but at this stage it is unclear whether they will achieve financial close.

What is increasingly apparent is that despite high growth in the consumption of cement, both

domestically and in Afghanistan, the industry seems to be heading for over-capacity again. The

extent of the over-supply will depend on growth in demand, but if all the assumptions stated

previously are correct, the year 2006-07 is going to be the start of another down cycle for cement

sector profitability. The problem is not so much an over-estimation of the growth rate but a

moral hazard created by the cartel arrangement.

In a boom period, companies that expand capture all the additional value from an expanding

market, whereas in a bust scenario they limit their loss by spreading it amongst all members

through the cartel mechanism by way of an across-the-board production cut in proportion to

capacities. In this way, they capture the upside gain, but mitigate their downside risk.

4.4 PAKISTAN ENTRY INTO WORLD CEMENT MARKET

After remaining a traditional supplier of cement to Afghanistan for the last so many years,

Pakistan has now entered the world market.

Shortage of cement in India and strong demand from North African countries, including Yemen,

has compelled three major players in cement to further expand their production capacities within

a short period of one year.

Bestway is further expanding its capacity by 4,000 tons per day, and the plant would come into

production next year.

Similarly, Luck Cement is also setting up another plant with a capacity of 6,000 tons per day and

D G Khan is reported to be also working on similar plans.

Presently, India faces an acute cement shortage in its Southern states of Tamil nado and Madras

and in north Punjab. However, reports indicated that the Indian industry is also working on a fast

track to expand their capacity in these regions to off-set the shortfall.

In the meantime, Pakistani exporters were exporting cement to Iraq but due to acute port

congestion, it remained irregular though there was great demand for cement after the war for

reconstruction work.

However, cement units in northern areas of the country continued to feed the traditional Afghan

market by supplying up to 2.5 million tons.

Similarly, strong demand for cement from North African countries, including Sudan, Ethiopia,

Algeria and some other states, made its way through the Red Sea port of Djibouti.

On average, cement exports to African countries fetch between $110 and $115 per ton C&F.

4.5 FUTURE

If the current pace of development continues and mega projects become reality, then it is very

likely that a lot of the cement will be utilized and it is unlikely that the surplus will enter danger

levels. The growth in demand to 20% during 2004 was most probably a one time boost for the

industry and the result of pent up demand from previous years and a higher economic growth

rate that spurred construction activity in the country. For 2006, it is predicted that demand will

grow at 13% and ease off after 2007 to 10%. This rate is more sustainable given that GDP in

Pakistan is expected to grow at over 8% and, theoretically, cement demand usually grows at a

factor of 1.5 of GDP growth.

Many cement manufacturers have said that the situation is very different from the nineties due to

the different and more stable political structure. But Pakistani politics is not stable. What if the

current political structure does not last? What if, God forbid, something happens to Musharraf?

Then what? Will all this development continue? Several industry insiders are concerned that the

cement industry’s recent growth has been far too dependent on the person of Pervez Musharraf.

There are worries that if another government comes to power, particularly a purely political

government, the industry’s fortunes will once again abruptly plunge back into the doldrums like

it did in the nineties. Optimistic as ever, Mansha disagrees: “I think the world has changed —

this is not the same world it was 10 years ago. If you look at all the globalization, you will see

that the progress towards development is irreversible now, whoever comes to power?”

It is hard to say what the future will hold for the cement sector. Dependent as it is on increasing

construction and development projects, it’s fate, whether it likes it or not, is tied up with the

stability of the country. Dams, roads, ports and other developments are dependent on the policies

of the government. Past governments have not attached importance to this so it is not a foregone

conclusion that any and every government will undertake massive public sector development.

Also, the new surge in foreign investment is a recent phenomenon and is also related to the

policies of the present government. On the positive side, however, there is always Afghanistan.

Once donor money starts coming in, the demand for cement in Afghanistan will rise, and as

cement is a basic commodity in reconstruction, the bulk of it (if not all) will have to be shipped

from Pakistan regardless of which government is in power.

4.6 IMPACT ON BUDGET

The budget will have a positive impact on the sector due to larger allocation to PSDP and

government’s focus on building infrastructure (road network and small dams). However, cement

demand from PSDP is directly linked to actual government spending on mega projects where the

work on mega projects remains slow and the government however has not made any

announcement regarding the construction of any mega dam project. The Reduction in import

duty on imported spare parts from 25 per cent to five per cent shall improve cement margins

where spare parts represent six to seven per cent of total cost of sales. This will also reduce the

cost of BMR and de-bottlenecking of existing cement plants of many players.

4.7 SOME RECOMMENDATIONS

4.7.1 GOVERNMENT PRESSURE

Due to low level of cement prices, the industry is not making adequate profits. If this trend

continues, cement companies will find it difficult to meet their financial obligations to the banks

and financial institutions. The government should not pressurize cement companies to reduce

cement prices to such low levels which may render them financially unviable.

4.7.2 EXCISE DUTY

Excise Duty on cement should be reduced by at least half, to bring the taxes on cement at least

to the level of India, if not to the level of countries like Thailand, Philippines, Egypt and

Malaysia.

4.7.3 EARNING FOREX

Bulk handling facilities at the ports should be undertaken on priority basis in order to avail the

opportunity of exporting around 10 million tons of cement to India, Middle East and African

countries to earn substantial foreign exchange which is direly needed to partly offset the trade

deficit.

4.7.4 SEEK DEMAND/SUPPLY FORCES

Cement manufacturers should give due consideration to demand supply parity of cement before

embarking upon further expansions in the production capacity of cement in the country.

REFERENCES

“Government May Ban Cement Export, If Prices Not Cut: Stakeholders Meeting Today”, Nov

2007, Business Recorder.

Farid Fazal, “Review of Pakistan Cement Industry”.

“Cement Industry Toying With Consumers”, 2004, DAWN.

“Fauji Cement Company Limited”, 2007, Business Recorder.

“Cement Sector: is Targeted Expansion Viable?”, 2004, DAWN.

“Cement Sector Outlook”, 2006, DAWN.

“Consolidation Of Cement Industry”, 2005, DAWN.

“Cement Dispatches Cross 2.25m MT in March”, 2007 , Daily times.

“Cement Manufacturers Link Price Issue With CED”, 2005, Daily times.

“Cement Industry: Packing Material Shortage to Affect Export to India”, 2007, Daily Times.

Ismat Sabir, “Cement Industry: In Focus”, 2005.

“Cement makers agree to stop export till April 30”, 2006, Pak tribune.

“Cement: DG KHAN CEMENT COMPANY LIMITED - Financial Statements Analysis June

2002 to December 2006”, 2007, Pak Tribune.

“High Growth in Cement Industry”, 2006, The Nation.