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PAKISTAN CEMENT INDUSTRY
Group Members: Mr. Tanseer Ali Mr. Ali Abbas Group Name: Submitted To: Submission Date: BRIGHT STARS Mr. Numair Ahmad 13-01-2009
TABLE OF CONTENTS
Page No. Acknowledgement Abstract 1 2
Past of Cement Industry of Pakistan
Overview Growth Pattern of Cement Industry of Pakistan Contribution to National Economy by Cement Sector What Is Going in Related Sector Government Attitude toward Sector Financial Analysis of Four Companies Major Economical Changes 3 6 7 8 9 10 15
Present of Cement Industry of Pakistan
SWOT 17 Major Contribution in Economical Growth of Pakistan Major Decisions in Budget 2008-2009 Effect on Sector Due to Changes in Interest Rate International Trend 22 25 26 26 Analysis
Future of Cement Industry of Pakistan
Industry Future Future Course of action for Cement Industry and Government Concluding SWOT analysis International Trend Strength of Sector which Attract Investors Resources condition of the sector Current Duty Rate & Subsidies Provided By Government 29 30 31 32 33 34 36 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 Punjab Sindh NWFP Baluchistan Total Units 8 8 6 1 23 Capacity (MillionTons) 7.488 3.851 4.945 0.758 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 company Northern Region Askari cement Askari cement Bestway cement D.G Khan cement Fauji cement Lucky cement Maple Leaf cement Pioneer cement Sub-Total Southern Region Essa cement Total
Year Commission 1964 1996 1988 1988 1997 1996 1998 1994
of New Capacity Created(Tons) 945,000 630,000 1,039,500 1,039,500 945,000 1,260,000 1,039,500 630,000 7,528,500 315,000 7,843,500
Expansion New New Expansion New New Expansion New
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
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
3. Pioneer Cement
Pioneer cement ratio chart:
4. DG Khan Cement
DG KHAN Profit Ratio:
Net Profit After Tax Ratio 2007:
Name Of Company Lucky Cement Fauji Cement Pioneer Cement DG Khan Cement Profit Ratio 20.34% 18.66% 3.0% 25.27%
30.00% 25.00% Lucky Cement 20.00% Fauji Cement 15.00% 10.00% 5.00% 0.00% Pioneer Cement DG Khan Cement 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 (JulyMarch) 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.
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.
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 PAK IST AN:
IC GR OWTH OF
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
Item Cotton Yarn Cotton Cloth Sugar Cement
UNITS 000 tonnes
2006-07 2845.2 977.8 3525.9 22739
JULY-MARCH 2006-07 2132.6 727.9 3247.6 16448 2007-08 2203.5 763.4 4351.2 194014
%CHANGE 3.32 4.88 33.9 17.95
Mln.Sq.Mtr 903.8 000 tonns 000 tonns 2960.0 18564
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 paidup 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 Value of Fixed Assets Deployed Loans from Financial Institutions Shareholders Equity Employment (Direct & Indirect)
Rs. 23.50 Billion Rs. 85.21 Billion Rs. 79.53 Billion Rs. 80.00 Billion 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
Afghanistan Via Land 2001-2002 106,62 0 430,32 2 India Via Sea & Land Other Countries Via Sea -
|---Clinker---| Other Countries Via Sea -
106,62 0 471,82 2 1,118,29 3 1,565,17 0 1,505,15 9 3,188,42 7 7,716,62 0 4,462,27 6
1,407,90 0 1,413,99 4 1,725,52 6 2,777,82 6 1,264,25 0
157,27 0 91,16 5 1,071,92 8 3,045,99 5 2,228,38 0
390,97 3 1,106,12 7 675,52 6
786,67 2 294,12 0
MONTHLY IMPORT AND EXPORT SCENERIO:
Month s North 1,662,9 91 1,706,3 58 1,541,7 33 1,546,2 09 1,718,6 25 8,175,9 16 South 284,1 36 256,7 52 263,3 27 194,8 91 271,1 17 1,270,2 23 Total 1,947,1 27 1,963,11 0 1,805,0 60 1,741,1 00 1,989,7 42 9,446,1 39 Months North 1,448,20 7 1,268,56 9 1,236,83 1 1,282,98 1 1,336,96 7 6,573,55 5 -19.60%
South 342,51 7 277,00 4 260,53 7 220,41 4 266,95 2 1,367,42 4 7.65% Total 1,790,7 24 1,545,5 73 1,497,3 68 1,503,3 95 1,603,9 19 7,940,9 79 -15.93% Growt h(%)
July Aug Sep Oct Nov Total
July August Septembe r October November Total Growth(% )
7.68% -9.42 % -2.88 % -2.77 % -6.67 % -15.93 %
Mon Afghan July Aug Sept Oct Nov Total
|----------Cement----------| India 11,316 37,557 47,363 96,236 Other (Sea) 194,7 39 260,4 88 226,1 58 194,7 11 176,7 38 1,052,8 34
Clinker (Sea) 25, 330 49, 402 53, 804 35, 455 84, 955 248, 946
221,028 265,620 257,354 192,774 257,598 1,194,374
July Aug Sep Oct Nov Total Growt h-%
|----------Cement----------| Other Afghanis India (Sea) 268,33 54, 384,2 4 300 10 262,96 59, 370,8 8 498 40 219,20 75, 457,3 2 221 07 238,33 37, 509,4 6 567 69 275,41 67, 506,5 0 534 55 1,264,25 294, 2,228,3 0 120 81 205.62 5.85% % 111.66%
Clinker (Sea) 106, 159 93, 888 145, 198 214, 894 115, 387 675, 525 171.35 %
Total 813,0 02 787,1 94 896,9 28 1,000,2 66 964,8 86 4,462,2 75 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 200405 (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 United 2001 90,450 2002 91,300 2003 92,600 2004 99,000 2005 99,100
States Brazil China Egypt France Germany India Indonesia Iran Italy Japan Korea Mexico Pakistan Russia Spain Thailand Turkey Others World total 39,500 626,500 24,500 19,839 28,034 100,000 31,100 26,650 39,804 76,550 52,012 29,966 9,876 35,100 40,512 27,913 30,120 351,014 1,700,000 39,500 705,000 23,000 20,000 30,000 100,000 33,000 30,000 40,000 71,800 55,500 31,100 9,985 37,700 21,000 42,500 31,700 32,600 350,015 1800,000 40,000 750,000 26000 20000 28000 110,000 34,0000 31,000 40,000 72,000 56,000 31,500 11,410 40,000 23,000 40,000 35,000 33,000 348,590 1,860,000 38,000 934,000 28,000 21,000 32,000 125,000 36,000 30,000 38,000 67,400 53,900 35,000 13,344 43,000 23,000 46,800 35,600 38,000 367,656 2,130,000 39,000 1,000,000 27,000 20,000 32,000 130,000 37,000 32,000 38,000 66,000 50,000 36,000 17,112 45,000 24,000 48,000 40,000 38,000 374,888 2,220,000
Saudi Arabia 20,608
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 unreasonable 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 understudy. 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.
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.
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 Electrical (DCS System Engineers) Mechanical( Killens Operators, Unskilled Labors Helpers 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
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
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