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PAKISTAN CEMENT

INDUSTRY
Army Public College of Management
Sciences
APCOMS

Group Members:
Mr. Tanseer Ali
Mr. Ali Abbas

Group Name: BRIGHT STARS

Submitted To: Mr. Numair Ahmad

Submission Date: 13-01-2009


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
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
Abstract:

Review of literature is on the overall setup and performance of Pakistan’s 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 the
research 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
CEMENT INDUSTRY OF PAKISTAN

Ov er view :
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.
The cement industry in Pakistan has become a long way since
independence when country had less than half a million tones
per annum production capacity. By now it has exceeded 10 million tones per
annum as a result of establishment of new manufacturing facilities and
expansion by existing units. Privatization and effective price decontrol in
1991-92 heralded a new era in which the industry has reached a level where
surplus production after meeting local demand is expected in 1997.

The cement industry is needed a highly important segment of industrial sector


that plays a pivotal role in the socio-economic development. Through the
cement industry in Pakistan has witnessed its lows and high in recent past, it
has 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 public
sector while the remaining 19 units are owned by the private sector. Two of
the four units in the public sector had to close down their operations due to
stiff competition and heavy cost of production. The cement plants are located
in every province of Pakistan.
The province-wise distribution of cement plant is as under.

Providence Units Capacity


(MillionTons)
Punjab 8 7.488
Sindh 8 3.851
NWFP 6 4.945
Baluchistan 1 0.758
Total 23 17.040

Three additional cement plants with installed capacity of over 2.1 million tons
are in the final stage of completion despite the available excess capacity in
this sector. The following table shows installation of new cement factories and
expansion 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
cement dispatches while the units based in the southern region contributes 13
percent to the annual cement sales.

Name of New/ Expansion Year of New Capacity


company Commission Created(Tons)
Northern Region
Askari cement Expansion 1964 945,000
Askari cement New 1996 630,000
Bestway 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 Expansion 1998 1,039,500
cement
Pioneer cement New 1994 630,000
Sub-Total 7,528,500
Southern Region
Essa cement Expansion 1988 315,000
Total 7,843,500
Growth Pattern of Cement Industry of Pakistan
Cement is one of major industries of Pakistan. Pakistan is rich in cement raw
material. Currently many cement plant are operating in private sector. The last
few years have been a golden period for cement manufacturers, when the
government increased spending on infrastructure development. High
commercial activity and rising demand for housing on account of higher per
capita 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 in
the corresponding period last year, showing an increase of
110 percent.
Pakistan cement industry has a huge potential for export of cement to
neighboring countries like India, U.A.E, Afghanistan, Iraq and Russian states.
These has been a robust growth of cement demand seen both in domestic
and exports market during the fiscal year ended June 30, 2007. The industry
achieved an overall growth of 32% with domestic demand of cement
increased by 24.95% where as exports increased by 111.86%. The overall
growth 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.
Pakistan cement industry has been successful to capture export markets of
various GCC and African countries, which are new markets for the country
other 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.
W hat I s Go ing in Rel ated Sector :

Pakistan has one of the highest population growth rates in the world, touching
3%. This has prompted a sizable demand for housing facilities in the country.
According to estimates of construction industry, there is a huge backlog of
about 6.25 million housing units in the country. Bulk of the current demand of
0.6 million units needed every year is for urban areas. With greater
urbanization the demand for cement is expected to grow at an average of
nearly 7% per annum..

The demand for cement for infrastructure units is expected to grow with the
commencement of work on motorways, power plants, and Islamabad New
City, Karachi Package and Ghazi Brotha dam. If all these projects are
implemented as per schedule, the demand for cement is expected to grow at
a higher rate.

The construction sector in Pakistan has played an important role in providing


jobs and revival of economy. It provides jobs to about 7 per cent of the total
employed labor force or to 2.5 million persons, during 1999-2000. There is a
lot of scope for importing latest technological advancements / hi-tech building
materials. Construction equipment & plants with the latest practices adopted
in the developed Countries after varied Research & development are badly
needed to be adopted by Pakistan as well. Quality Control & Materials Testing
Laboratories & Equipment are need of the time. There is unlimited scope for
investment in this sector.

Globally, construction and engineering services industry is regarded as one of


the largest fragmented industry accounting for 10-12% of GDP in many
countries. Benefiting from both public and private investments, the
construction industry is a prime source of employment generation offering job
opportunities to millions of unskilled, semi-skilled and skilled work force. The
total 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 interest
rates 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.

Go ver nment Att itude to war d Sector

Tax structure
Instead of providing any relief in the budget, the sector was further penalized
with a 3% increase in sale tax to 18%. So far, the manufacturers have been
able to pass on the increase to consumers but the situation is unlikely to
continue. However, the possibility of formation of a cartel cannot be ruled out.
Since massive investment has been made in the sector, any reduction in price
of cement can reduce profit margin of all the units.

Formation of cartel and fixation of price at a level high enough to cover


increasing cost of inputs and ensure reasonable profit margin may provide
short-term relief to the manufactures. Such a cartel may be against the
interest of consumer but can help the manufacturer to survive with some
dignity. Formation and smooth operation of a cartel is generally difficult but in
the case of cement industry it may not so because the only restriction could
be on the level of capacity utilization along with a modest uniform reduction in
the price of cement. However, the units are in the diverse state of financial
health, enjoy different level of competitive advantage, and therefore need
different prescriptions to maintain their profitability.

Excise Duty
In budget 2008-2009 the federal excise duty on cement has been to Rs 900
per tonnes from the existing base of Rs 750 per tonnes.

Financ ial Ana l ysis of Four compan ies


1. Lucky Cement
2. Fauji Cement
Fauji cement

3. Pioneer Cement
Pioneer cement ratio chart:
4. DG Khan Cement
DG KHAN Profit Ratio:
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%

30.00%

25.00%
Lucky Cement
20.00%
Fauji Cement
15.00%
Pioneer
10.00% Cement
DG Khan
5.00% Cement

0.00%
Profit Ratio
Majo r Econo mica l Changes
1. 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 tones
during 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 demand’s 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.
SWOT ANALYSIS:
Strengths:

1. Availability of Raw Material.


2. Imported Machinery and plants in most of companies, which provide
better 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 an
exporter of cement and clinker in the region, Sources said the industry
projections suggested that the cement industry exports would reach to
$735 million by the end of 2008-09 and it would touch $1.043 billion by
the 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 moderation
in 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 for
mortar 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 in
last three years
• GDP growth is expected to continue to have same positive
impact on demand growth
8. Housing demand to grow:
Following indications have showed a considerable demand of
cement in Pakistan:
• Housing projects consume roughly 40% of cement demand
• Currently 0.3mn houses are built annually against demand of
0.5mn
• Low interest rates, post 9/11 remittances’ inflow, and real
estate boom have helped housing sector
• growth
• Easy mortgage availability and announcement of low cost
housing schemes will determine housing sector growth in the
long-run.
9. Government’s development spending shall continue to rise due
to:
• Government development expenditures count for one third of
total cement consumption
• Increase in development expenditures has helped cement
demand to grow at very high rates
• Increase in PSDP- as announced in Medium Term
Development Framework 2005-10 - will help cement demand
to grow in the country
• Infrastructure development in a region triggers private
development projects having even positive impact on cement
demand
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 of
the 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.

Weak nesses:
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
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 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.
3. The customer has no choice at all to switch between two brands of
cement due to cartel of all of the cement manufacturers in Pakistan.
4. 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 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.
5. 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.

T hr ea ds:
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 cement
manufacturers.
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.
4. Main component of the cost is fuel. Pakistan's cement industry has
converted their plants to coal considering it to be the cheapest fuel, but
its price in international markets has gone up by more than 300 per
cent in the last one year, which directly relate increasing the cost of
production.
5. The demand of cement falls heavily during rainy weather in the country,
which directly affects the running cost of a unit. It is only the rising
levels of cement exports, which are sustaining the industry.
6. Instead of appreciating the marketing skills of cement entrepreneurs to
explore new markets for cement, the industry is being pressurized
constantly without realizing that any reduction in cement exports from
Pakistan will not only deprive the country of foreign exchange ($2
billion 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 by
cutting down or abolishing the central excise duty.
8. Problems of oversupply situation:
Following problems might arise with the oversupply situation in cement
industry:
• Lower capacity utilization will reduce benefits of economies
of scale. High leverage will also adversely affect profitability
of new plants.
• New plants will gain market share at the cost of older
players, which are not undergoing expansion. Large idle
capacity is will create panic in players and this may result in
price wars in the coming years.
9. IMF Package in Future can cause to decrease GDP and economical
development in Pakistan. Which will also be cause to stop
development of infrastructure. So it will have huge effect on cement
industry also.

Opp or tuniti es:


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 open
the window of competition from cheaper markets. There 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 Pakistan’s 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.
MA JOR CONT RI BUTION IN ECONOM IC GR OWTH OF
PAK IST AN:
Cement demand’s 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.
During the last three years the large-scale manufacturing sector is showing
signs of moderating along with a subsequent slowing down of the economy
and 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 2007-08
over last year are pharmaceuticals (30.7 percent), wood products (21.9
percent), 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) and
cotton 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 of


Statistics)

JULY-MARCH
Item UNITS 2005-06 2006-07 %CHANGE
2006-07 2007-08
Cotton 000 tonnes 2546.5 2845.2 2132.6 2203.5 3.32
Yarn
Cotton Mln.Sq.Mtr 903.8 977.8 727.9 763.4 4.88
Cloth
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 the
KSE. During the period under review, the performance of cement sector
remained lackluster. Share index of cement declined by 17.8 percent during
July-April 2007- 08. Its market capitalization also declined by 0.2 percent in
the outgoing fiscal year. 2007 was a year of cement industry expansions. As a
result, supply has been enhanced, but depreciation and financial charges
have increased. A high interest rate scenario has made the situation
challenging 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 Khan
Cement, Lucky Cement played major role.
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 stock
exchanges. 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 an
unprecedented growth of 32% year-to-year basis. Industry has an installed
Cement production of about 37 million tons per annum, over stripping
domestic demand. The surplus Cement has an encouraging export market
demand from neighbouring countries like India and Afghanistan and there is
great potential to export the surplus cement to the Middle East. Realizing the
rapid development in the construction industry
Export of Clinker and Cement
(Qty/Tons)
|------------------Cement-------------------| |---Clinker---|
Other
Years Afghanistan India Other Countries
Countries
Total %age
Via Sea &
Via Land Via Sea Via Sea Incr/(Decr)
Land

106,62 106,62
2001-2002 - - - 100.00%
0 0

430,32 41,50 471,82


2002-2003 - - 342.53%
2 0 2

1,118,29
2003-2004 1,118,293 - - - 137.02%
3

1,407,90 157,27 1,565,17


2004-2005 - - 39.96%
0 0 0

1,413,99 91,16 1,505,15


2005-2006 - - -3.83%
4 5 9

1,725,52 1,071,92 390,97 3,188,42


2006-2007 - 111.83%
6 8 3 7

2,777,82 786,67 3,045,99 1,106,12 7,716,62


2007-2008 142.02%
6 2 5 7 0

1,264,25 294,12 2,228,38 675,52 4,462,27


2008-2009 72.13%
0 0 0 6 6

(5-Months)
MONTHLY IMPORT AND EXPORT SCENERIO:
IMPORT DISPATCHES
2007-2008 2008-2009
Month Growt
s North South Total Months North South Total h(%)

1,662,9 284,1 1,947,1 1,448,20 342,51 1,790,7


July 91 36 27 July 7 7 24 7.68%
1,706,3 256,7 1,963,11 1,268,56 277,00 1,545,5 -9.42
Aug 58 52 0 August 9 4 73 %
1,541,7 263,3 1,805,0 Septembe 1,236,83 260,53 1,497,3 -2.88
Sep 33 27 60 r 1 7 68 %
1,546,2 194,8 1,741,1 1,282,98 220,41 1,503,3 -2.77
Oct 09 91 00 October 1 4 95 %
1,718,6 271,1 1,989,7 1,336,96 266,95 1,603,9 -6.67
Nov 25 17 42 November 7 2 19 %
8,175,9 1,270,2 9,446,1 6,573,55 1,367,42 7,940,9 -15.93
Total 16 23 39 Total 5 4 79 %
Growth(%
) -19.60% 7.65% -15.93%

EXPORT DISPATCHES

2008-2009
Mon |----------Cement----------| Clinker Mon |----------Cement----------| Clinker Total
Other Other
Afghan India (Sea) (Sea) Afghanis India (Sea) (Sea)
194,7 25, 268,33 54, 384,2 106, 813,0
July 221,028 - 39 330 July 4 300 10 159 02
260,4 49, 262,96 59, 370,8 93, 787,1
Aug 265,620 - 88 402 Aug 8 498 40 888 94
226,1 53, 219,20 75, 457,3 145, 896,9
Sept 257,354 11,316 58 804 Sep 2 221 07 198 28
194,7 35, 238,33 37, 509,4 214, 1,000,2
Oct 192,774 37,557 11 455 Oct 6 567 69 894 66
176,7 84, 275,41 67, 506,5 115, 964,8
Nov 257,598 47,363 38 955 Nov 0 534 55 387 86
1,052,8 248, 1,264,25 294, 2,228,3 675, 4,462,2
Total 1,194,374 96,236 34 946 Total 0 120 81 525 75
Growt 205.62 171.35
h-% 5.85% % 111.66% % 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 government
privatizations. So we have many cement manufacturers which generate more
and more of employment possibilities. Today cement industry is contributing
3% 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 Tonne
from the existing base of Rs 750 per tonne.
2. The Finance Bill seeks to extend exemption on ready mix concrete
blocks. Previously, building blocks of cement were only exempted
under this Schedule.
3. Despite the fact that cement constitutes as one of the basic necessities
for shelter, the policy makers have subjected the cement sector to the
highest taxation in the region. The levy of General Sales Tax (GST) on
cement is Rs660 per ton in Pakistan as compared to Rs320 in India. it
is said that Pakistan has one of the highest tax rates on cement in the
Asian region. The impact of such tax and duty structure has resulted in
almost 40 per cent increase in the cement price per 50 kg bag when
compared to India suppressing demand for Pakistan cement.

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-high
levels in late nineties, which increased the burden of financial charges on
relatively highly leveraged cement sector. State Bank discount rate was as
high 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 do
not anticipate interest rates to soar as high as they were in late nineties. Our
long-term stance on interest rates is stable. By 2006, when cement units, in
general, have start interest payments by 2006, a stable debt service scenario
occurs. 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 growth
might create severe crises for the sector couple of years forward
Inter na tional Trend :
Global Scenario
During the year 2004 world’s cement production has increased by 2.56% by
50 million tons and consumption increased by 3% as compared to previous
year. World demand for cement is forecast to increase 5 percent per year
through 2008.
Cement Industry - Regional Review
China 
China is the largest producer and consumer of cement, having 850 million ton
production capacity and consumed 36 percent of total world’s production.
From 2000 to 2004, the cement industry showed an average annual growth of
9 %. In 2004, the total output of cement in China increased by 12.5 % from
2003. The industry has benefited from the growth in real estate and the rapid
growth of the national economy. It is anticipated that Chinese cement industry
will grow by 5% till 2008, owing to boom in construction activity, and will
account for 44% of global demand in 2008. The demand for cement is
expected to continue to grow as China implements its strategies of developing
the western regions, reinvigorating the traditional industrial bases in northeast
China, its urbanization drive, its projects for transportation of natural gas, and
projects related to the 2008 Beijing Olympics and the 2010 Shanghai World
Expo.
India
With the total installed capacity 163 million tons in 2005 India is the second
largest producer of cement in the world accounting for approximately 6% of
the global production.. Actual cement production in 2003-04 was 123.50
million tons as against a production of 116.35 million tons in 2002-03, which is
an 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 because
government has increased spending on infrastructure and huge investments
are flowing in the road and the power sectors. Other sectors like ports and
airports 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 further
driving the demand for cement. Production target of 133 million tons has been
set 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, mainly
through expansion of existing plants.
Iran
Iran’s current production capacity stands at 32 million tons, and it is expected
that capacity will rise to more than70 million tons by 2010. During the current
year three plants are expected to come online and capacity will reach up to 37
million tons at the end of the year. Current boom in housing sector and overall
infrastructure activity in the country, Iran is consuming most of its production
within 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 in
terms of cement production, while 12th and 15th in terms of consumption and
export of the commodity respectively. Further due to ample availability of raw
material and fuel Iran has most economical rates of the commodity in the
world.

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 fact
that superfluous domestic demand has surpassed supply as most of the local
cement manufacturers were operating at 100% capacity and still weren’t able
to meet present demand. Presently some of the cement companies are
exporting cement to Afghanistan, Iraq and UAE only to maintain their
presence in these markets. After completion of major expansion plans in
Pakistan in 2007, there would be a surplus to export in these markets
however in the same period Iran would also be able to approach vigorously
these markets as its most of the cement plant will start to come online. At that
juncture there would be extreme competition between both countries to
capture these markets, especially the war-ravaged countries (Iraq and
Afghanistan). Iran would get benefit in terms of price as cement prices in Iran
is 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 US
ally, Pakistan would get most of the favor in order to keep its market share in
these markets given the fact that all the construction activities in Iraq and
Afghanistan would be taken by US. Despite the fact that cement constitutes
as one of the basic necessities for shelter, the policy makers have subjected
the cement sector to the highest taxation in the region. The levy of General
Sales Tax (GST) on cement is Rs660 per ton in Pakistan as compared to
Rs320 in India. In the light of this tax regime, it is said that Pakistan has one
of the highest tax rates on cement in the Asian region. The impact of such tax
and duty structure has resulted in almost 40 per cent increase in the cement
price per 50 kg bag when compared to India suppressing demand for
Pakistan cement.

World’s Cement Production (Qty = 000 tones)


Countries 2001 2002 2003 2004 2005
United 90,450 91,300 92,600 99,000 99,100
States
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 17,112
Russia 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

Industr y Futur e:

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


the Pakistan People’s Party’s (PPP’s) slogan has always been ‘roti, kapra
aur makan’ (bread, clothing and housing). In this regard a statement of the
new 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 in
Pakistan cement industry. According to the analysts of Pakistan Credit Rating
Agency (PACRA) the cement sector is currently facing stern challenges
emanating from a wide spectrum of socio-economic risks including contracting
economic activities, and high input costs. These negative developments,
along with the prevailing credit crunch and rising interest rates, have further
constrained the industry's prospects.
The conducive economic environment not only fuelled the local demand but
also provided impetus for capacity expansion. Resultantly, the industry added
significant capacity recently, while several new production lines are scheduled
to commence operations shortly. During this period, the cement
manufacturers also established export operations by catering to the growing
demand of regional economies. This, while stabilizing the local cement prices,
had a positive impact on capacity utilization and margins. Although the local
demand dwindled significantly in the first quarter of FY 09 (around 15%
decline), strong growth in exports has provided support to the industry in the
form 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 prices
that could lead to a price war among producers. The looming supply overhang
scenario in the sector could potentially worsen the situation. Profitability of the
sector has come under pressure due to high energy cost (comprising around
50% 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
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 interest
rates 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.

Future Course of action for Cement Industry


and Government:
Rel ated go ver nmen tal r e gu la tions :
The policy of the Government is to keep a balance between rapid economic
development, on the one hand, and social justice and consumer’s 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 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 central
excise duty
7. Long term measures:
• Infrastructure at port.

8. Pakistan could save about $70 million on the import of furnace oil per
annum. 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 as


against Pakistan where the taxes on cement are 37 per cent, it is nil in
Iran, 7 per cent in Thailand, 10 per cent in Egypt, 10 per cent in
Philippines, 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

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.

International Trend:
Although international energy prices have declined recently, any beneficial
impact on margins has largely been negated by substantial depreciation of
Pak Rupee. PACRA, therefore, believes that the performance of cement
companies could weaken further impacting their financial profile. Pakistan's
cement industry is poised to face a tough challenge as the regional markets,
mainly China and India, are likely to emerge as competitors in the export
market, following a slowdown in their domestic economies and enhanced
production capacity.

Competitions in export markets:


With regards to the competition in export markets, we have observed
following behaviors of cement industry in Pakistan:
1. Cement exports started in FY02 to Afghanistan that is still a major
market
2. Iraqi market can become a potential target after peace is restored
3. India and Iran are the major competitors for Pakistan in the Middle
Eastern region
4. Upcoming capacity expansions in Iran and other GCC countries will
create 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

Str ength Of Sector W hic h At tr act In vestor s:


Pakistan provides relatively strong protection for foreign investors, it ranks
19th worldwide on protecting investors, according to World Bank report
Doing 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 cement
industry.

Duty Free Port of Gwadar:


Pakistan was previously relying on its Karachi port for the shipment of its
imports and exports. It was over crowded and expensive. Pakistan has built a
new deap sea port at Gwadar in the strategically imporant Province of
Balochistan bordering with Iran. This port has been declared duty free, on top
of this cheaper labour makes it the cheapest port in the whole South Asia
region.
Pakistan’s Foreign Investment Policy
The investment policy regime has been liberalized with most economic
sectors open for foreign involvement.

The Government has therefore liberalized its investment policy, promoted a


stronger and faster enabling framework and opened up almost all sectors for
foreign investment while offering tax and other incentives for investment as
well as enabling 100% ownership for foreign investment in many areas. The
new Investment Policy provides equal investment opportunities for both
domestic and foreign investors.
The Government has decided to give “priority industry” status for foreign
investment into information technology, oil and gas exploration, mining,
leather production, corporate farming, livestock and dairy, financial business
and trade, infrastructure, tourism, housing and construction sectors. Complete
freedom of choice has been provided on where to locate an activity

Employee issues
Pakistan is one of the countries having low labour cost as an advantage. But
like U.K, Pakistan also have minimum wage legislation, laws of prohibition of
child labour, working conditions at work, health and safety regulations and
labour rights Act, and termination of employment laws.

Resources condition of that


sector

MATERIALS AND ENERGY:


The following raw material is required in the production process which are
frequently available in Pakistan.

1. Lime stone:
This raw material is extracted from the near by mountains. Limestone
has the highest composition in the cement product. 75% to 80% of the
cement constitutes of limestone.

2. Clay:
Clay is another natural resource. This raw material is also companies owned.
15% to 20% of cement composition comprises of clay
3. Iron Ore:
Iron Ore is the only resource that is bought from contractors. Iron Ore is
added in small quantities and it helps to strengthen the cement.
4. Gypsum:
Gypsum acts as a retarding agent. It slows down the hardening process,
which in turn gives the constructor enough time to use it. Again it is taken
from nearest mountains.
5. Furnace oil:
It is used mainly for power generation. Initially the companies was relying
on WAPDA for power supply but now the companies have thier own
electricity generation plant that provides upto 50% of the total
requirements. With the increase of furnace oil prices the companies are
expected to move to adopt coal as a more cost efficient and
environmentally friendly fuel for kiln firing. Today the management is
exploring possibilities of alternative and cheaper fuel such as waste firing
etc.

People (Labor):
Pakistan is one of the countries having low labour cost as an advantage. The
direct labor that works in cement companies include both Skilled and unskilled
labors:

Skilled Labor Unskilled Labors

Electrical (DCS System Engineers) Helpers


Mechanical( Killens Operators, Trolly Men
Cement Mill Packers, Crushers, Packers)
Civil Engineers Loaders

The companies in cement sector takes their people as one of


its most valuable assets they view their human resource as a
competitive advantage therefore they ensure that their
employees only those people that are self motivated and
professionally qualified. They also take into consideration that
their business goals are realized through such diverse work
force providing equal opportunities without any discrimination
on 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 the
need arises.
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
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 Cement”


By 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