Cement Industry Pakistan Diamond Model Analysis

Cement Industry
History
1947 Only 4 factories Existed with a capacity of 0.5million tons
In 1972 the factories increased to 14 with a capacity of 2.5 million tons
In 1973 The industry was nationalized
State cement corporation of Pakistan was formed (SCCP)
1985 the industry was deregulated and it was decided to privatize the firms
1991 Privatization started
2011 Current Capacity of 44 million tons
Significance
Contributes Rs 30 billion to taxes
The per capital world consumption is of 270kg
Pakistan per capital consumption is of 145 kg
The industry provide employment to 150000 people
There are 29 plants in the industry
21 are operational
The sector contribution to FDI is of $80.4 billion
Pakistan Exports 7.71 million tons of cement to
Afghanistan, India , Middle east , African countries ,Iraq
Pakistan is the 5th largest exporter of cement in the world
Cement is important for development of under develop countries
It is required for process of urbanization and rehabilitation

Factor Condition
Raw Material
(75-80)%Lime Stone is required
15-20 % clay is Required
5% gypsum is required
Iron ore
Pakistan has has abundant resources of these raw material
limestone in Baluchistan is produced (90000metric tons annual)
Gypsum production is of 36000 metric tons
iron production is about 260 thousand tons

Packaging

Without proper packaging cement can get spoiled

Cement Shelf life is 3-6 months
The cost per Bag is $0.25

Labour
skilled labor is required in ratio 2:3
unskilled labor is required for transportation, vender, etc
skilled labor consist of engineers from local universities(Ned, NUST)
Cheap labour is an advantage

In-house training is carried out ,by foreign experts

Machinery
Machinery is imported from China ,Europe and Italy
The production process is standardized
Pakistan lacks the capacity to produce the mlocally
Quality control equipment is also imported

Source of Fuel
One ton of cement requires 3400-5000mj fuel energy
60-70% cost is of fuel
50% of this cost is required for clinker buring
20% is pre heater gas

Source of Energy

Oil
Gas
Coal
Electricity
Gas has many short comings even though its cheaper compared to Furnace oil(FO).The
reason is that the required temperature cant be reached while using gas
In addition to this there is a shortage of gas in Pakistan as well
Companies mostly use FO and coal

Pakistan resources
Pakistan has 180 billion M.tons of coal, though it has a higher sulfur content of 6%
Hence coal is imported which has a sulfur content of 1%
the cost of coal is Rs 868 per ton
The cost of FO is Rs 2083 per ton
The domestic coal that is used comes form Quetta
Cheaper fuel sources are also considered E.g
Used Tyre are also used that have a potential to meet 40%of the requirement

Technology

in 1970s semi dry process was introduced

in 1980 Dry process was discovered .
Since than no significant break through have occured

Research and Development

waste heat recovery plant

In house electricity generation
Labor training
Production Process
Dry Process required 85Kg of FO per ton
Wet process requires 165 kg of FO per ton
85% of production in pakistan is through Dry process

Price/Cost:

Average cement prices are RS290 per 50 kg in 2010. (rise of Rs 40)

Though 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 sharp decline in cement prices were due to domestic competition among producers has
dampened the profitability of the industry.
To cope with this situation the manufacturers have strengthen cartel to set minimum
cement prices.
Energy cost is a major component of total cost of production. It contributes at an average 40
to 45 percent towards total cost of cement production.
General Sales Tax is Rs 660 per ton as compared to Rs 320 in India (2008-2009)
GST became 17% in 2010

Cartels:

There is a cartel in the cement sector and that regulate the production of cement in the
country. The cartel restricts the quota of each manufacturer to sell in the domestic market
based on its market share, which in turn is derived from the available installed capacity.

Types of cement:
1. Ordinary Portland Cement
2. Sulphate Resisting Cement
3. White Cement
4. Blast furnace slag cement

Production process:
In the wet process raw materials are fed into kiln in slushy form. As it consumes more
energy to raise the temperature of the kiln to the required levels it is costly. In the dry
process the ground raw materials are fed into the kiln in dry powder form therefore energy
consumption is low to raise the temperature to the required level. Cement plants established
in Pakistan up to the seventies were based on wet process whereas the plants established in
the eighties and onward are based on dry process
Majority of Pakistani Industry employs the Dry Process rather than the semi wet or wet one.
Crushing Grinding Pyroprocessing Grinding of Clinker and Packing

Demand Conditions

Pakistan Population increases at a rate of 2.1% per anum

Demand due to urbanisation
Availability of credit to population and firms
state bank discount policy plays a significant role
Political stability effects the demand
Economics Conditions of Pakistan and world
Seasonal variations also effects teh demand for cement
Higher demand in summers
Public sector development projects and other project effect the demand for the cement
Housing sector demand consist of 40% of the total demand
Current consumption of Pakistan is 22.5 million tons
there has been a 77% decline in PSDP
Floods have also decreased the demand in Pakistan in 2010
Government has Imposed a quota of 70% of capital utilization

International Demand
Chines market is huge
China Produces 1.7 billion tons of cement per year
Though the chines demand has declined due to policy of the government
Saudi Arab has lower price of cement due to avalibility of cheap fuel
Iran has 55 plants and produces double of what is required
Afghanistan market for pakistan is important

EXPORT DEMAND:

The exports stood at 7.656 million tons during July-April, 2010-11 against 8.799 million
tons during the same period of 2009-10 which is a decline of around 15% from last year
(DailyTimes 2011). The major countries affecting Pakistani exports are:
1.
Afghanistan
2.

China

3.

India

4.

African Countries

5.

Saudi Arabia

Iran
Some of them are our emerging and existing competitors while others are our emerging
and existing markets. We will analyze them in detail to find out the reasons behind the
fall of exports in the current fiscal year. Also later on we will look at the governments
role in this situation.
6.

Firm Structure and Rivalry

Oligopoly with 16 firms listed on the stock exchange
80% plants located in North Pakistan
Lucky cement has a market share of 12.7%
Maple Leaf has a market share of 7.1%
DG cement has a market share of 9.8%
pioneer Cement has a share of 5.5%
APCMA is an apex body for cement manufactures
its purpose is to project the industry to the government
20-27 plants are operational
There are Barieers to entry
The industry is dominated by large players
They achieve economies of scale
Firms are located near raw material sources due to transportation fesibility
Prices are similiar
There exist cartels in Pakistan
Competition commission has imposed a fine of Rs 6.35 billion due to formation of a
cartel

There was a price war in 2009 which resulted in a decrease in price

Related and Supporting Industry

Housing Sector total demand is 40%
State bank has lent Rs 55 billion to private sector for housing
Investment in the industry of Rs 950 billion during 2005-2011
Government Projects dams (3.7 million tons demand if they are accepted )

Shipping Industry

Pakistani ports has low efficiency

It takes 3days to load the same amount that indian load in 6 hours
Russian and US are unreachable due to high cost

Packaging Industry -polypropylene

the pakistani industry is growing at a rate of 15% as compared to world average of 8%

Packaging has significant importance as it protects the cement
Currently there is a shortage of 12 million bags
Companies produce a bag at a cost of Rs 28-40 (per bag)

Mining and Quarrying Industry

Pakistan mining industry has much potential to develop

Still mining is not mechanized in Pakistan
Low skill labour is required in pakistan
Huge deposit of limestone and gypsum

Transportation

Russia is a possiblemarket
Local transportation cost is higher than India (Rs 8/ton in pakistan as compared t oRs
3/ton)
Inland subsidy Freight been given is about 35%

Government
North plants dont have access to the sea that resulted in a loss of Rs 10 billion
Pakistan have a heavy tax structure
Rs 700/ton of tax been given
2.5% special duty
GST of 17%
5% tax on utilities
Rs 87 of tax been taken per ba

#2

The Diamond Model For The Pakistani

Rice Industry Economics Essay
When we think about the fact that why do nations compete, the first and foremost reason that we
need to consider is the standard of living. All nations compete essentially to increase their standard
of living. An increased standard of living makes sure that the citizens of any country have factors
such as widespread education, access to health facilities and employment opportunities amongst
many others.
Porters Diamond Model for the comparative advantage of nations consists of four main attributes
which shape the national environment in which domestic firms compete.
Factor Conditions:
These include factors such as skilled workforce, technological advancements, natural resources etc.
Demand Conditions:
These conditions describe the nature of the demand of the local market with respect to the foreign
demand.
Related and Supporting Industries:
Local competition between related and supporting industries creates innovations and cost
effectiveness within the industry which drives up productivity
Firm Strategy, Structure and Rivalry:

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This includes how companies are created, organized and managed. In addition to this it talks about
the nature and extent of local rivalry.
These four factors promote the competitive advantages of firms, industries and nations. Business
leaders can use this model to determine competitive factors and create benchmarks for their firms
and industries. Furthermore the model can be used to analyze which countries to invest in and which
countries have more potential for development.

ADVANTAGES & DISADVANTAGES OF

PORTERS MODEL:
The Porter Model has several advantages. They are as follows:
It helps a nation or a firm to utilize its resources to the best of its abilities
It helps a nation or a firm to be competitive
It helps a nation or a firm to streamline its natural capabilities and improve upon them
It brings about innovation and technology
It helps nations build up on their competitive advantage
It helps to open up nations and firms to global market and opportunities
The disadvantages of the model are as follows:
It makes the firms concentrate too much on particular resources
Diversification is promoted at a much later stage
Many implications depend on the element of luck
There is no guarantee that the application of the model will be successful as every nation has a
different case.
The model does not take culture history into account
Porters model can be applied to nations across the globe provided that the nation concentrates on
converting its basic resources into advanced ones. Pakistan can well focus on its agricultural
products as it has an advantage here. However the focus should be on making the sector more
technology and innovation savvy. Pakistan is still struggling in this aspect. However according to
recent research the industry has moved in a positive direction albeit slowly.

THE DIAMOND MODEL FOR THE PAKISTANI

RICE INDUSTRY
FACTOR CONDITIONS
Factor conditions in the diamond model can be categorized under human resources, material
resources, knowledge resources, capital resources and infrastructure. According to Porter it is not
necessary that these factors are naturally present in a country or inherited. They can develop and

change. Factor conditions provide initial advantages to the nation and industry which are then built
upon. Each nation has its own particular set of factor conditions hence the development of each
nation is of a different kind and pace due to these factors.
Pakistan is an agro based economy where rice plays a major role. Rice is a very important crop for
Pakistan for several reasons. Firstly, rice is second staple food and contributes more than 2 million
tons to our national food requirement. Secondly, rice industry is a significant source of employment
and income for rural people. Thirdly, it contributes to the countrys foreign exchange earnings.
Research shows that rice is grown in three stages in Pakistan. The first stage is that the rice is
shelled when it is grown. This means that the eatable rice is taken out from the shell and the shell is
then used as a by-product. Then it is re-processed to remove the bran from the rice. After the
removal of bran the rice is known as the rough rice. Bran itself is a very useful byproduct of the rice.
In Pakistan all this work is done manually and usually unskilled workers are used which reduces the
efficiency and increases the cost of making and delivering rice. In the third stage the rice is
transported to the city and then polished after which it is exported to various countries such as USA,
UAE etc.
Pakistan has been blessed with abundant natural resources that work in its favor where rice
production is concerned. These resources allow Pakistan to produce Basmati rice which is one of the
finest qualities of rice in the world. It is a non replicable variety and is grown in high quantities in
Pakistan due to the fertile Pakistani soil, humid climate and slit forming deltas carrying high level of
nutrients to the rice plains. Another high quality breed of rice that is produced in Pakistan is the IRRI
rice. This is hybrid rice and it is grown in Pakistan because of its heat and salt tolerance. Rice
growing season is fairly long and suitable for cultivating fine aromatic Basmati as well as some IRRI
varieties.
However limited water availability plays an adversary role to rice production as water is a major
component for production. When monsoon rains do come they bring much relief but they also bring
floods at time which ended up damaging 400,000 tonnes of rice paddy in 2011. When rice is
harvested it needs a proper storage place which unfortunately is not a concept developed in
Pakistan. If the rice is harvested and rainfall occurs then the whole crop is destroyed.

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Technology is a very important factor in todays world. Technology contributes heavily towards
productivity and efficiency. In Pakistan the technology, with respect to the rice industry, is not as

progressed as it should be. Traditional and outdated post harvest practices have resulted in
substantial losses of output and quality of Basmati rice. However, big brands in Pakistani rice, like
Matco, are trying to solve this problem. Matco recently invested in the most moder agro processing
infrastructure that aims to correct the post harvest losses problem in the rice industry. With the
collaboration of the latest Japanese and American technologies the Sadhoke project of Matco
contains the latest technology such as modern paddy dryers, rice paraboiling units etc.
There is also a transportation issue associated with the rice industry. USA uses cargo trains to
transport rice. However in Pakistan trucking is mainly used for transporting rice although its much
cheaper to transport it through trains. Even though train transport will benefit farmers more, it is still
not done in Pakistan. Another factor to consider is the law and order conditions of Pakistan. This
factor along with rapidly changing governments and their policies can hinder development of any
industry, the rice industry included.
Agriculture is the major industry for Pakistan and thus this sector provides employment to a large
number of the population. This applies to the rice industry as well thus we can confidently say that
the rice industry is highly labor intensive. However just like most other agricultural sectors of
Pakistan, the workforce in the rice industry is also largely unskilled. Around 90% of the workforce is
illiterate and has minimal training. Only workers hired in big rice mills have the appropriate training to
function the machines. The workforce is highly underutilized as a lot of potential exists for training
and development. However as the rice industry is a labor intensive industry, it is suited to Pakistans
high population as more employment is generated through this sector.
As far as investment is concerned, the Pakistan rice industry seems to be an ideal place to attract
foreign direct investment. This is because of limited avenues of investment in the global arena. The
investment in infrastructure and technology is much needed as both these things are traditional and
outdated still in Pakistan. This is contributing to a decrease in the competitiveness of the rice industry
of Pakistan. There is huge untapped potential in this sector but millions of dollars are required t
modernize this industry so that there is minimum wastage. To fulfill the need for a better
infrastructure, big investments of time, money and efforts have to be made.
As local demand is easily met, there are huge quantities of rice that Pakistan is exporting. Rice
millers and producers tend to be export oriented because this reaps them higher profits than local
markets. Good crop and competitive pricing is expected to increase exports. International
competition from India with regard to Basmati rice decreased Pakistani Basmati exports in 2012.
Even though Pakistan has better quality rice than India, Indias promotion, marketing and finishing of
rice is better which results in higher exports for India as compared to Pakistan. However this
competition should be used to further develop the industry so that Pakistan surpasses its
competitors.

DEMAND CONDITIONS
Demand conditions are the second element in the diamond model. Porter defines the demand
conditions as: "The nature of home demand for industrys product or service demand conditions

describe the level of domestic demand that a firm faces." Thus demand conditions depend on not
only the quantity of the demand but also the nature or sophistication of demand. Porter points out
that the primary source of competition between firms is due to local demand. A high and
sophisticated domestic demand drives firms within a nation to have higher productivity and efficiency
which further drives these firms to be competitive on a global basis. The nature of local demand also
makes domestic firms aware of the new and emerging trends in the in international markets. It also
helps in shaping a firms responsiveness towards buyer needs.
According to Michael Porter, the local demand should be anticipatory of the foreign demand and it
should be sophisticated. Competition at local level can lead to national productivity and innovation. It
also means that a country can achieve national advantages in an industry or market segment, if the
local demand provides clearer and earlier signals of demand trends to domestic suppliers than to
foreign competitors. Normally, local markets have a much higher influence on an organization's
ability to recognize customers needs than foreign markets do.
Pakistan grows high quality rice for local as well as international demand. Rice is a very important
crop for Pakistan. It stands second after wheat in crop production in Pakistan and is a staple food for
the Pakistani people. Rice is also an important source of foreign exchange ratings. Foreign and local
demand for rice is increasing and the rice industry has the potential to produce more so production is
expected to expand to 6.3 million tons of milled rice. There are a number of associations such as
REAP(Rice Exporters Association of Pakistan) that are promoting Rice industry in the international
arena.
Local demand for rice is easily met as production is very high due to favorable edaphic conditions.
From all the rice produced In Pakistan only 40% is locally consumed whereas 60% is exported. The
domestic demand for rice in Pakistan measured up to be 2.5 million tons in 2012.
As far as brands of rice are concerned, there are few branded rice present in the Pakistani market.
The three most well know are Falak rice, Guard rice and Mughal rice. However research shows that
recently the brand awareness has increased and the consumer base has widened very significantly
due to brand promotion in the local markets. This trend is seen in the international market for rice as
well.
Moreover as we have seen there is little investment in the rice industry but a huge potential for
development exists. Recently only there have been investments in modern agro processing
infrastructure and technologies which will result in higher quality rice to be produced which is now
being demanded locally. It will also lead to reduced post harvest losses. When we interviewed Mr.
Naveed from Engro, he even stated that the reason Engro entered the Basmati rice industry is
because they saw huge potential in the industry and a huge gap where there were not many known
firms present for trading. He stated that there is a need for more big firms in the industry because
investment is desperately needed.
Initially after the rice industry was privatized, the competition used to be on price rather than quality.
However, now a shift is seen in the local market towards quality. Now buyers in the local as well as
international markets are demanding high quality rice. Demand for parboiled rice is also increasing
day by day due to its nutritional value and high quality. Furthermore, the price of rice in the local

market has increased despite higher production. This is because there has been an increase in the
cost of cultivation as well as strong local demand for high quality rice.
The demand for rice is also affected by the way our consumers market is segmented. According to
buying power of consumers, the market for rice can be divided into three broad groups. These are:
Lower Income groups: This segment is the major market of broken rice and IRRI rice
Middle income group: This segment purchases good quality rice which is polished rice as well as
semi-polished rice
Upper income group: This segment prefers to buy high quality branded rice
Furthermore unethical practices also exist in the local market that affects demand. Firms in the rice
industry usually mix different varieties of rice to lower the net price rather than transforming the value
chain to ensure good quality rice at a lower price thus having a negative impact on the market.
There are several possibilities through which we can achieve the targets of demand conditions.
Firstly, our local buyers are progressing towards the point where they display sophisticated demand
and responsive behavior. Secondly, the base for innovation, product improvement and quality
maintenance is coming from Foreign Markets. Many exporting companies have been barred because
of their sub-standard products. For them, getting a quality assurance certificate is the first step and
maintaining it is another. Pakistan has now become aware of the need for such credible quality
assurances