Introduction

History

The cement industry is one of the few industries that existed in Pakistan before the partition of
the sub-continent. One of the main reasons for this is the availability of raw materials required to
produce cement in the Pakistan region of the sub-continent. Pakistan has an inexhaustible
reserve of limestone and clay that can still support the industry for another 50 to 60 years.

In 1921 the first cement plant was established at Wah. At the time of independence in 1947 there
were four cement factories with an installed capacity of 470,000 tons per annum. These units
were located at Karachi, Rohri, Dandot and Wah

In 1947, the annual production of cement was only 300,000 tons per year. By 1954, the numbers
increased to 660,000 tons against a demand of 1 million tons per annum. At this time the
Pakistan Industrial Development Corporation (PIDC) took initiative and established two cement
factories Zealpak, with a capacity of 240,000 tons, and Maple Leaf, with a capacity of 100,000
tons thereby increasing the annual production to meet local demand. Since then besides
expansion of the existing plants, new plants have also established. Besides producing OPC, the
Pakistani cement industry also started producing SRC, Slag cement and white cement.

Nationalization

Under Zulfiqar A. Bhuttos political reign, Pakistan underwent a significant amount of

nationalization. And so did the cement sector. The cement industry was nationalized in 1972 and
the State Cement Corporation of Pakistan (SCCP) was established following the Economic
Reforms Order, 1972. As a result of nationalization, a total of 10 cement units with an installed
annual capacity of 2.8 million tons were transferred to the SCCP. Effective price control was also
vested with the SCCP and for a long time the industry operated under a regime of strict
regulation and price control. While the cement industry was working under the state control, the
SCCP established five new units with an installed annual capacity of 1.8 million tons. For the
next 15 years, no new cement plant was established under the private sector. This resulted in
severe shortage of cement in late 70s and early 80s. To meet this shortage in demand, cement had
to be imported into Pakistan. Not to mention, severe shortage of cement and price deregulation
prompted the private sector to establish more plants. Seven units were established in the private
sector before commencement of the process of privatization in 1991.

Privatization And Deregulation

During Nawaz Sharifs political era in the early 1990s, the Pakistani industry cement inclusive
went through some major changes. As a part of the governments privatization policy, the
Government of Pakistan privatized 8 cement plants in 1992. Due to this privatization, new plants
were set up under the private sector, and the SCCP also lost its control over the prices of cement.
Also in contrast, cement factories set up under the private sector employed more efficient dry
processes to produce cement where as those still under the SCCP were still using inefficient wet
processes.

Current Scenario

The Cement sector of Pakistan accounts for 1.2% of the global cement production. It holds great
importance as it not only fulfills Pakistans local demand and brings foreign exchange in the
country through exports, but it also provides more than Rs.30 billion in taxes to the national
exchequer, and provides up to for 3% of the workforce in the country. Pakistans current
consumption per capita is 147kg vs. a global average of 527kg. This number has greatly
increased in the last decade with 2003 per capita consumption being 70kg. This indicates the
rapid growth experienced in the last decade and the potential for further growth.
Figure 1: Per capita consumption of cement in 2012

Figure 2: Top cement producers in the world in 2012

Figure 3: Top cement consumers in the world as of 2012

As evident from figures 2 and 3, China is the largest producer and consumer of cement. Pakistan
is the 15th largest global producer of cement.

Figure 3 shows yearly comparison of the consumption of cement in the local market against
imports from 2008 to 2015. In 2015, Pakistans cement sales clocked in at 35.4 million tons;
local sales accounted for 28.2 million tons (80%) while the share of exports was 7.2 million tons
(20%). The local sales of cement have vastly improved since the last year with last year local
sales being 26.15 million tons (up 7.89%). On the other hand, exports have declined by 11.6%
with last year exports being 8.14 million tons.

Capacity

Currently Pakistan has a capacity of 44 million tons. There are capacities scheduled to come
online in a few years time as several manufacturers have announced expansion plans. By 2017
the capacities are expected to reach 52 million tons. The fiscal year 2014-2015 saw average
capacity utilization at 77.6% while the capacity utilization of last ten years has been 78.5%.

Pakistans cement sector is divided into two zones: North and South. Major players in the south
zone include Lucky Cement and Attock Cement. North zone comprises of several players
including DG Khan Cement, Maple leaf cement, and Cherat cement among others. Figure 6
illustrates the %age of major players in the Pakistani cement industry. Lucky Cement has the
largest market share equating to 16.2%, followed by Best way Cement (12.3%), DG Khan
Cement (9.2%), Fauji Cement (7.5%), Maple Leaf Cement (7.4%), and a number of other
smaller players totaling to 47.4%.

Capacity Utilization

Production capacity of cement manufacturers has more than doubled over the last decade to
45.6m MT/annum (FY06: 20.8m MT/annum). In terms of installed capacity top 5 cement
manufacturers (Lucky, Best way, D.G. Khan, Fauji & Maple Leaf) comprised 58% of total
installed capacity. Average capacity utilization over the last decade has ranged from 73% to 89%
and has witnessed steady increase with significant growth noted in the ongoing year (9MFY16).
With highest ever monthly dispatches of 3.58m tons during March2016, capacity utilization
stood at a healthy 95%.
 Table 1: Capacity Utilization - North

Year Capacity Total Dispatches

Capacity
(Million Tons) (Million Tons) Utilization

9MFY16 37.99 22.49 78.93%

FY15 37.99 27.91 73.47%

FY14 36.99 27.09 73.24%

FY13 36.99 26.45 71.49%

FY12 36.99 25.63 69.28%

Capacity utilization for South Zone players is higher vis--vis North Zone due to
better positioning to tap export markets. Export dispatches represent around one-
third of total dispatches for South players vis--vis one-tenth for players in the
North Zone. With higher local demand and better retention prices, local
dispatches for South Zone have depicted an uptick in the ongoing year. However,
it is unlikely that major players in the South Zone will completely do away with
exports, despite the significantly lower retention prices, on account of
diversification benefits.

Table 2: Capacity Utilization - South

Year Capacity Total Dispatches

Capacity
(Million Tons) (Million Tons) Utilization

9MFY16 7.65 5.86 102.1%

FY15 7.65 7.49 97.90%

 FY14 7.65 7.19 93.97%

FY13 7.65 6.99 91.35%

FY12 7.65 6.89 90.04%

Statement Of Installed Capacity As Of October 2016

Sr.
Name Of Unit Operational Capacity
No.
Clinker Cement
1 Askari Cement Limited - Wah 1,050,000 1,102,500

2 Al-Abbas Cement Limited - Nooriabad, Dadu 900,000 945,000

3 Askari Cement Nizampur 1,500,000 1,575,000

4 Attock Cement Pakistan - Hub Chowki, Lasbela 1,710,000 1,795,500

5 Bestway Cement Limited - Hattar 1,170,000 1,228,500

6 Bestway Cement Limited - Chakwal 3,428,571 3,600,000

7 Bestway - Mustehkum Cement Limited - Hattar 1,035,000 1,086,750

8 Cherat Cement Company Limited-Nowshera 1,050,000 1,102,500

9 Dandot Cement Limited - Jehlum 480,000 504,000

10 Dewan Hattar Cement Limited - Hattar 1,080,000 1,134,000

11 Dewan Hattar Cement Limited Dhabeji 1,680,000 1,764,000

12 D.G.Khan Cement Limited - D.G.Khan 2,010,000 2,110,500

13 D.G.Khan Cement Limited Chakwal 2,010,000 2,110,500

14 Fauji Cement Company Limited - Fateh Jang 3,270,000 3,433,500

15 Fecto Cement Limited Sangjani 780,000 819,000

1,140,00
16 Flying Cement Limited Lilla 0 1,197,000
17 GharibWal Cement Limited Jehlum 2,010,000 2,110,500

18 Kohat Cement Company Limited Kohat 2,550,000 2,677,500

Lafarge Pakistan Cement Company Limited -

19 1,950,000 2,047,500
Chakwal
20 Lucky Cement Limited Pezu 3,605,714 3,786,000

21 Lucky Cement Limited - Indus Highway, Karachi 3,428,571 3,600,000

22 Maple Leaf Cement Factory Limited Daudkhel 3,210,000 3,370,500

23 Pioneer Cement Limited Khushab 1,933,571 2,030,250

24 Thatta Cement Limited Thatta 465,000 488,250

Total 43,446,428 45,618,750

Economic Development

The contribution of cement industry in the economic development can be measured by the value
addition of the cement industry to Gross Domestic Product of the country, creation of
employment opportunities, receipts from exports, tax payments, and the entire revenue generated
by the cement industry. The cement industry of Pakistan is one of the major industries of
Pakistan which have an enormous impact on the economic development of the country. The
contribution of cement industry is very effective not for only the manufacturing sector but also
for the entire economic development of Pakistan. The cement industry of Pakistan was once a
very small industry but it rapidly grew with the passage of time and finally it entered in the
export market. The cement industry contributes in the Gross Domestic Product (GDP), it creates
employment opportunities for thousands of people and it creates huge revenue for the
government in the form of taxes. It directly and indirectly contributes in the economic
development of Pakistan. It also makes contribution in the development of its allies industries
especially the transportation sector is largely benefitted by it. The cement industry of Pakistan
attracted not only domestic investors but also foreign investors.
World perspective of Cement industry

The international cement market is one of the least regulated markets on an international scale
whereas international cement trade has been growing intensively in recent decades. While the
amount of cement traded has increased, the percentage of internationally traded cement to total
cement production remains in single percent digits (5% to 7%). This means that most of cement
production exists to satisfy local consumption.

The problem this research will explore is identifying the most critical factors required to regulate
the growing market for international cement. Initial fact finding suggests that cement production
has recently been concentrating in the developing world (Miller, 2009). Such increasing
production of a capital-intensive (labor-saving) industry means that the impact the cement
market is having on the local labor markets is low compared to the impact it is having on the
capital market. Even though economic rents are considerable, cement is one of the most polluting
industries: 5% of the worlds total emission of greenhouse gases is caused by cement production
(Loreti, 2008). This means that the developing world is increasingly baring the environmental
burden.

Any solution suggested to the problems caused by the cement industry has to be composed of
three crucial elements. First, it must be implemented on an international scale. Local solutions
cannot solve the problem. The environmental impact of burning fuel necessary to produce
cement in China, if uncontrolled, will lead to global warming because of the emission of
greenhouse gases caused by the burning. The impact of global warming however is not limited to
China alone but may have an extended impact on countries even as far away as South Africa.
Second, the developed world has to create an incentives system that does not shift all production
to areas that are less regulated. While it is desirable for European and North American countries
to achieve green economies by closing down cement factories or enacting strict environmental
regulations, it is a major problem when such cement production is only shifted to countries with
looser environmental regulations (Miller, 2009). Third, corruption and hidden transaction costs
within developing nations exacerbate the problem. Whether it is the lack of strong environmental
regulations or weakly implemented competition laws, developing countries can be a haven for
poor environmental control and strong cartels especially in a very high fixed cost industry such
as cement (Mishkin, 2007 and Selim, 2009). Any solution that does not contain these three
elements should be considered lacking.

The growing production of cement calls on all countries and NGOs to begin seriously
considering a global policy to solve the problems posed by this industry. An effective global
policy can only be found if different actors cooperate. Being a capital-intensive industry that
utilizes scarce resources to operate (such as fuel) means that governments need to keep some sort
of an eye on production. Even though cement is locally produced the impact of the production is
global and the presence of lucrative opportunities to shift production sites makes the industry an
attractive one for governmental regulation. It is this interaction between the economic
(efficiency) and the political (institutional) that calls for finding a framework for evaluating
solutions that takes into account both ends.

Challenges and issues

The cost and exports may be affected due to weakness of the US dollar causing coal, electricity
charges and freight prices, world-cement comprising 65 to 70 percent of the cost. The PSDP
allocation for 2009 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 current 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.

Major General Rehmat Khan, Chairman of All Pakistan Cement Manufacturers Association
(APCMA), told Business Recorder, cement industry is getting Rs 24 per ton as day
dutydrawback for export of cement which needs to be revised. In view of todays calculation for
duty drawback, which works out to Rs 130 per ton, he proposed that duty drawback be increased
to Rs 130 per ton ,instead of Rs 24 per ton.

Referring to taxation on cement, he said that cement dispatches are subject to payment of federal
excise duty @ Rs 900 per ton, general sales tax @ 16 percent, special excise duty @ 1 percent,
marking fee @ 0.1 percent of ex-factory price, besides provincial duties and taxes. These taxes
come to around Rs 96 per bag which is the highest in the world. Cement, it appears, is being
treated as a luxury item for the purpose of taxes and duties.
He proposed that the government should reduce excise duty by Rs 450 per ton in the forthcoming
budget while the remaining half should be eliminated altogether along with the special excise
duty. Besides this, sales tax should not be charged on excise duty paid value.

He also proposed withdrawal of customs duty on Pet Coke and remove it from negative list for
import from India because cement industry imports Coal and Pet Coke as fuel for production and
customs duty on imported coal is zero while on Pet Coke it is charged @ 5 percent.

Taxes

The cement sector contributes Rs. 15-20 billion per annum to the National Exchequer. The
taxation policy should have ensured lower prices since cement is an essential commodity for the
development of an economy. The industry in Pakistan is paying Rs. 90 per bag as excise duty as
compared to Indian producers who pay only Rs. 17.50 per bag. If the excise duty rates are
revised to Rs. 300 per tonne then the price owf domestic cement can be reduced to as low as Rs.
160 per bag. Inordinate and frequent increases in taxes create a dilemma for local cement
manufacturers since they have to appreciate their prices every now and then, adding to the lack
of stability in the form of fluctuating prices. This has led to a reduction in the demand for
cement. The rates of excise duty have been escalating at the tremendous rate of 350% in the last
10 years and 200% in the previous 5 years. This is the reason per capita consumption of cement
in Pakistan is as low as 71 kg. Import of machinery for expansion was exempt from duties until
1995 after which 10% regulatory duty was imposed on all imported goods. This led to arise in
the capital cost of new plants and on-going projects. Apart from excise duty the sector adds to the
state revenue in the form of:

Provincial royalties on limestone, gypsum etc.

Import duties on spares and parts
Octopi on all items purchased
Excise duty on all raw materials

The rapid escalation in excise duties has transformed the sector to a loss making industry from
one that was earning around 35% profit margin previously. Under the principles of taxation only
those commodities should be subjected to high rates, the consumption of which is intended to be
restricted and discouraged such as cigarettes and alcoholic drinks. On the contrary cement is a
basic commodity which has the potential to promote development efforts and therefore its
availability in the market at a reasonable price should be ensured.

Debt servicing

The financial crisis in the industry has led to a severe liquidity crunch in this sector. The debt
burden comprises of $300 million owed to international agencies and around Rs. 20 billion debt
is outstanding in relation to the local banks and DFIs. Financial charges have been on the rise
ever since 1992 when they amounted to only Rs. 428 million, while in 1998 the same amount
had risen to Rs. 1595 million. Cement manufacturers are in a fix as to what to do to remedy the
situation. One option available to them is liquidation and 4 of the companies had to eventually
resort to this. Fauji Cement, D.G.Khan Cement, Pioneer and AC Wah are nearing a default
situation on their debt servicing on loans obtained from foreign institutions such as International
Finance Corp. and Commonwealth Development Corp. total credit liabilities of the sector
towards local banks is to the tune of Rs. 23.881 billion. Details are as follows:

COMPANY LOANS(Rs.million)

Pioneer 1450.35

D.G.Khan 312.36

Cherat 284.95

Fecto 215.86

Maple Leaf 2919.45

Javedan 388

Dadabhoy 296.5

Essa 225.32

Kohat 444.26

Slag 20.77

Zeal Pak 33.81

Dandot 83.74

Lucky 136.34

Pakland 603

Fauji 617.29
Companies have been unable to pay interest due on loans, owe payment to utility companies like
WAPDA and KESC. Depletion of stocks of furnace oil and paper bags for packaging and
defaults in payments to suppliers adds to their burden bringing them nearer to the edge. Late
payment of bills will lead to an additional loss in the form of 10% surcharge. Suppliers on the
other hand will demand immediate payment with the due penalties to avoid a complete default
by the manufacturers. Low stocks of paper bags will delay dispatches of orders and tarnish the
goodwill developed with the consumers.

Increasing capital cost of plants

The cement industry is a capital-intensive industry with heavy reliance on the engineering sector
of the economy. In addition to this, the manufacturers depend on technology, which is usually
imported when setting up a new plant or considering expansion. So far European and American
plants are being set up in the country. The cost of a 2000-tonnes per day plant lies within the
range of Rs. 3.5-4 billion and for a 3000-tonnes per day plant the capital cost is approximately
Rs. 5.5-6 billion. This large capital outlay is increasing financial charges.

70% of the plants in Pakistan have been supplied by a Danish firm named FL Smidth. Japan and
Germany have sold only 2 plants here. The situation now is such that FLS is now a price- making
monopolist who is causing a steady upward trend in the price of its plants. All the new 15 plants
being set up have been sold to us by FLS except those of Saadi Cement and Kaiser Cement. Due
to persistent devaluation plants which cost Rs.35-80 millio n in 1993 are now in the range of Rs.
3-6 billion. This hinders expansion plans and adoption of latest technology by the new and
existing plant.

GOVERNMENT POLICIES
The cement industry continues to operate under pressure of inconsistent Government policies
announced from time to time.

These briefly are:

Capacity taxation was abolished from August 1993 which took away special incentives
for increased production which, in turn could have revived the industry in the larger national
interest.
The taxes and duties on inputs have consistently been increased. The system of charging
excise duty is extremely unfair as cement being voluminous product, freight and allied
charges vary widely from place to place.
The price of furnace oil, a major cost component of cement manufacture, has increased
sharply. Just now it has increased to Rs. 8800 per tonne.

Import of machinery for expansion project was a exempt from import duties and sales tax which
expired on June 30, 1995 and additional duties have been imposed on imported goods. This has
increased the capital cost of the on-going projects in addition to the effect of devaluation of the
Pak Rupee.

EXPORTS

Since consumption of cement in southern region has gone down and northern region has attained
self-sufficiency, units located in southern region are forced to cut down their capacity utilization.
The possibility of cement export is the proverbial silver lining for the recession-torn industry.
While there are cement deficient countries like Sri Lanka and Bangladesh importing
approximately 2 million tonnes per annum each, there is tough competition from India and
Chinese suppliers.

In fact, apart from the prices offered by Pakistani manufacturers, lack of facilities for handling
bulk export of cement has become a major impediment. Where bulk handling is cheaper than
handling bagged cement. Export of cement is necessary for the existence and survival of the
industry rather than a source of profit.

PROBLEMS

Dumping by Chinese manufacturers, lack of incentives, high costs of production and freight
charges have made the cement export unviable. In the recent development, there has been a
radical change in the political scenario of Afghanistan. The war-ravaged country is a prime target
for the northern producers to sell their cement. This possibility is still remote until the situation
settles. According to an IRS all countries except Bangladesh and Philippines are in a position to
export cement and hence pose competition for Pakistan. Yemen is another potential destination
but there too government subsidized cement from Gulf countries will pose serious competitive
threat.

Apart from non-competitive prices domestic cement manufacturers face problems in the form:

Inadequate port facilities

Present export rebate of 12.5% of FOB i.e., Rs. 300 and Rs. 270 per tonne for cement and
clinker respectively is very high
Clinker/cement are not Non-Traditional Exports and therefore denied extra 50% rebate
Export of cement allowed only via sea which eliminates cheaper road transport through
Afghanistan and into Central Asia
Lack of sufficient duty and surcharge drawbacks. Reimbursement of these duties to the
exporter should be made.