cement industry pakistan

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this an industrial analysis of cement industry of pakistan.

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INDUSTRIAL AND COMPETITIVE ANALYSISCEMENT INDUSTRY OF PAKISTAN Submitted to: Ms. Zainab DarBBA 2K5-B 6/30/2007

TEAM MEMBERS:SYED USMAN WAZIR (GL) FATIMA SYED QURAT-UL-AIN RAUF ASIM REHMAN ZEESHAN AHMED

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Table of ContentsIntroduction: ................................................................................................................................................. 3 Structure:..................................................................................................................................................... 4 Conduct ....................................................................................................................................................... 5 Performance ................................................................................................................................................. 5 Related governmental regulations .............................................................................................................. 6 Herfindahl Index .......................................................................................................................................... 7 Lerners Index: .............................................................................................................................................. 8 Advertisements: ........................................................................................................................................... 9 New Product Development: ....................................................................................................................... 9 Capacity Expansion cycle: ......................................................................................................................10 Capacity addition cycles in the industry ..................................................................................................11 Capacity expansions are targeted at domestic markets: ........................................................................11 Demand and growth:..................................................................................................................................12 Competition in export markets:.................................................................................................................19 Problems of overcapacity: .........................................................................................................................19 Oversupply situation in local markets:......................................................................................................20 Financial Obligations will determine price strategy:................................................................................21 Conclusion: ................................................................................................................................................23

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INDUSTRY: - CEMENT INDUSTRY OF PAKISTAN

Introduction:Cement industry is indeed a highly important segment of industrial sector that plays a pivotal role in the socio-economic development. Though the cement industry in Pakistan has witnessed its lows and highs in recent past, it has recovered during the last couple of years and is buoyant once again.

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Structure:A market is a group of buyers and sellers exchanging goods that are highly substitutable for one another. Markets are defined by demand conditions; they embody the zone of consumer choice for the goods. Now, market for Cement in Pakistan exists in two main dimensions: 1. Product type 2. Geographic area.

Product type: Since cement is a specialized product, requiring sophisticated infrastructure and production location. So, most of the cement industries in Pakistan are located near/within mountainous regions that are rich in clay, iron and mineral capacity. Structure of Cement industry in Pakistan is as such that there is not much substitutability to buyers. Which shows that the Cross elasticity of demand is negligible. Geographical Area: The other factor i.e. geographic location also doesnt affects a lot considering the flexibility of demand. Example can be taken from the fact that if DG cement in DG KHAN raises its price and MAPLE LEAF CEMENT in DaudKhel will raise its price to match DG cements. This is due to cartel of all of the cement manufacturers in Pakistan. Thus the customer has no choice at all to switch between two brands of cement. As the cement market is moving from a virtual 'sellers' market' to an over-supply situation, it is expected that when prices stagnate and profitability becomes a function of volume and economies of scale, location advantage and proximity to markets will become extremely important factors. At present the freight charges are a massive 20% of the retail prices. The plants located very close to each other and tapping the same market will have to expand their markets which will increase their freight expenses. Dandot, Pioneer, Maple Leaf and

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Garibwal are all located within a radius of 100 kilometers and are selling bulk of their production in the same areas and will thus face serious competition from each other. Market Share: The market share if Cement industry is as such that since large number of manufacturers are in the market and are targeting the entire market through the formation of Cartel. So the dominancy of market share is yet to be analyzed by us. This dominancy can be attributed to two factors: 1. Brand name 2. Product quality. Since pricing is similar so production capacity can provide a vague idea with regards to the market share of all the players.

Conduct ConductCement industries in Pakistan are currently operating at their maximum capacity due to the boom in commercial and industrial construction within Pakistan. Consumers face a tough decision with regards to prefer which brand over which because of the similar pricing of cement industry. The formation of cartel by the cement manufacturers have exploited local consumers a lot and this has led to the concentrated degree of oligopoly, where the firms are acting as a single unit to perform their monopoly. Their combined market power is simply a diluted version of the dominance that a single firm with a monopoly market share can exert.

PerformanceThe 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. Deregulation after accession of Pakistan to WTO is expected to open the window of competition from cheaper markets. There

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may be no 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 40 per 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.

Related governmental regulationsThe policy of the Government is to keep a balance between rapid economic development, 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 of free competition therein. The Ordinance was promulgated to provide for measures 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. The government is considering allowing further concessions and additional incentives for cement export, with a view to increase overall export volume. These measures will immensely help in promoting and protecting high investments made in cement sector in recent years. In the wake of its huge surplus production as a result of massive capacity expansion undertaken it rather seems

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imperative for Pakistani cement industry, on one hand, to sustain existing export markets and, on the other, explore new markets.

Herfindahl IndexIn Pakistan there are 27 cement manufacturers that are playing a vital role in the build up of countrys economy and contribution towards growth and prosperity. For the calculation of Herfindahl index we have chosen 5 dominant industries of Pakistan, on the basis of their production capacity. The market share of these firms is as follows: Askari cement (NZP) DG cement Lucky cement Maple leaf Pioneer cement 7.6% 9.8% 12.7% 7.1% 5.5%

Where si is the market share of firm i in the market and n is the number of firms.

(0.127^2)+ (0.098^2) + (0.076^2) + (0.071^2) + (0.055^2) = 0.395 Since the Hirfindahl index is above the standard set of (0.18) for an unequally distributed market share industry. This indicates that there is a high concentration in the cement industry.

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Market shareAskari cement (NZP) DG cement Lucky cement Maple leaf Pioneer cement Others

Lerners Index:Average industry price of cement bag/50Kg Average industry cost of cement bag/50Kg = Rs.235 = Rs.192.5

L = (P-C)/P Where L is the Lerners index