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Cement Industry

Historical Perspective
Pakistan is naturally endowed with materials raw needed for cement industry,
example, gypsum. We had a plant in Wah and one another when Pak was
established. Cement Demand was pretty high initially. State Cement Corporation
was formed in the seventies. There was an ongoing demand for cement. Eighties
and nineties were stagnant eras in terms of both demand and capacity increase. In
2000s, we saw foreign interest, and doubling of capacity. We have 28-29 production
plants, and approximately 15 companies.
Cement industry is differentiated between North and South. Why isnt there equal
presence over the whole country? Concentration in North is because of availability
of raw materials. There is infrastructure demand in Pakistan. Demand in South is
recent. Due to accessibility of ports. To excess sea port for exports. North has
seventy percent of the capacity. There is more plant capacity on both sides, the
ratio can change in the future.

Structure of Cement Industry

There are a few large firms, and they maintain an oligopoly. They keep prices high.
They control production.
Size of the firm according to plant capacity, you can produce only that much. In
order to enjoy greater share, they have to increase plant size. When the prices get
out of control, the government imposes restrictions.

Factor Conditions
Limestone, gypsum, clay is the raw material. Fuel is however a higher constituent of
the cost of production. The former only constitute five percent the cost of
production. We get raw materials domestically, mainly from Baluchistan and KPK.
We import machinery from Germany and China. We import second hand plants. Our
plant sizes are relatively small. Ranging from small to medium.
Major cost is the fuel and power cost. We use furnace oil and coal. Firms have
shifted from furnace oil to coal in their production process. Oil prices are relevant
towards transport costs and for powering machinery used for extraction. We use
imported coal for production. Prices are around $52. The prices have been declining
because of decline in demand, particularly in China and India, due to environmental
concerns, and the demand for China is going down in general. People are now
switching back to oil due to lower prices. We import coal from Indonesia and South
Africa. Cement markets are faring well these days due to low prices of power
Government has imposed tax on craft paper. The current cost is Rs. 25 per bag
which is pretty high when you consider the volume.

Demand Conditions of Cement Industry

Local Demand
Local demand comes from private sector investment, that is housing sector,
commercial sector, and also government spending. PSDP has been increasing.
Anticipated demand is there due to CPEC. Projects in the South arent as cement
intensive as compared to the North. Demand is projected more in the North due to
hydro power plants. The projects will benefit the North more. GFCF Gross Fixed
Capital Formation is taking place in Pakistan, when these increase, demand rises.
When investment to GDP ratio rises, cement demand is expected to grow as well.
Local demand is CAGR.
Private sector demand is mostly coming from housing sector. Interest rates, rising
population, rising per capita income, trend towards nuclear family system, members
per household increasing. There has been a significant urbanization trend leading to
housing. Demand for cement goes down in winter season and rainy season.
Summer weather is conducive for production. Seasonal factors exist. We have a lot
more capacity for use of demand, but we dont as compared to the globe.
Because of increase in population we see a rise in high rise projects. High rise
buildings have gas issues. We have unplanned urbanization. Development will be
discouraged if this continues, the shortage of gas. We are facing extreme
competition from Iran in terms of exports to Afghanistan.
CPEC related projects in the South are cement intensive.

International Demand
North export markets are separate from the South. North markets are exporting to
Afghanistan and India. Our exports are declining, but local demand is offsetting this.
Exports to Afghanistan depend on proximity, in certain areas, Iranian exports
dominate. Norths companies are not affected due to increase in local demand.
Even if the demand of export markets declines, their profitability doesnt decline, as
local demand is seeing an upward wave towards the North. 36% of the Sales of
South are export based, and the local demand is increasing on a relatively lower
pace. We export from South by sea to the middle east, (their demand is being met
by other players in closer proximity), Mozambique, and South Africa (putting
antidumping duties). Overtime exports are going down due to competition from
Egypt. South might face problems in the future.

Supply of Cement
Cement supply capacity doubled from 2002-2012. Our capacity utilization at
present is 80%. With projection of increased demand in cement. And companies are
planning to expand in the future. Lucky and Chirat will be expanding in the North.
And Attock and DG Khan in South. Expansion in North wont misbalance supply, only
capacity will increase by 9%.
Unless government puts import duties on Iranian cement, we can face problems in
the Southern Region in terms of lower costs of imported cement in comparison to

local cement. Iranian cost structure could be better than us, and their tax structure,
this affects their export rates.

Related and Supporting Industries

Banking Industry
In Pakistan, there is not a strong correlation between cement and banking industry,
as housing mortgage demand doesnt increase. However, demand for the high rise
commercial builders will increase when interest rates decline. It moves the engine
positively towards increase in demand.

Packaging Industry
There is domestic production of Kraft Paper, although most of it is imported.

Transport Industry
Oil prices affect the transport costs.

Energy Sector
Energy sector isnt all that relevant anymore as most industries depend on
electricity generators. These power plants were operated on gas, because of lower
prices as compared to oil. However, the new plants coming up, will be using coal,
due to lower prices and shortage of gas. They are also using energy efficient prices.

Substitute Industries
Wood could be a substitute.

Byproducts Industries
We export cement in the intermediate form of cement which is Clinker.

Barriers to Entry
Due to oligopoly and cartels there are higher barriers to entry. It is a capital
intensive industry with high set up costs. There is low capacity utilization. Thus
there is no place for new firms to enter.

Bargaining Power of the Buyers

We dont have substitutes or product variety. There are no price wars. If Iranian
cement enters in the market, Southern customers will have a different option.

Bargaining Power of Suppliers

You have to take whatever prices the international suppliers are giving to you, as
you are a very small player in the market. Were importing coal from South Africa
and Indonesia. We are price takers.

Competitive Rivalry
Collusive behavior hence there isnt much rivalry. Though we have seen price wars
in the past, 3 to 4 times, but having been subdued very fast. They occurred to

increase market share. When economy was slowing down, these guys wanted a
greater share. They did so by reducing prices. They were pushed back in place
eventually due to high fixed costs. This happened in 2007 and 2008.

When demand is high prices should be driven low, but these are capital intensive
industries and government realizes they need the collusive behavior. The bigger
players had their gas intensive power plants. It was only gas prices which were
affecting them. They had captive power plants, and the prices of gas were still
relatively lower than electricity costs. Things are rosy at the moment for fertilizer