Cement Industry

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Compiled by: Mirza Rohail B

History & Introduction
Growth of cement industry is rightly considered a barometer for
economic activity. In 1947, Pakistan had inherited 4

cement plants with a total capacity

of 0.5 million tons. Some expansion took place in 1956-66 but could
not keep pace with the economic development and the country had
to resort to imports of cement in 1976-77 and continued to do so till
1994-95. The industry was privatized in 1990 which led to setting up
of new plants. Although an oligopoly market, there exists fierce
competition between members of the cartel today.
The industry comprises of 29 firms (19 units in the north and 10
units in the south), with the installed production capacity of 44.09
million tons. The north with installed production capacity of 35.18
million tons (80 percent) while the south with installed production
capacity of 8.89 million tons (20 percent), compete for the domestic
market of over 19 million tons. 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 around 80 percent share in total cement dispatches while the
units based in the southern region contributes 20 percent to the
annual cement sales.
Cement industry is indeed a highly important segment of industrial
sector that plays a pivotal role in the socio-economic development.
Since cement is a specialized product, requiring sophisticated
infrastructure and production location. Mostly of the cement
industries in Pakistan are located near/within mountainous regions
that are rich in clay, iron and mineral capacity. Cement industries in
Pakistan are currently operating at their maximum capacity due to
the boom in commercial and industrial construction within
Pakistan.
The cement sector is contributing above Rs 30 billion to the national
exchequer in the form of taxes.
Cement industry is also serving the nation by providing job
opportunities and presently more than 150,000 persons are
employed directly or indirectly by the industry.
The industry had exported 7.716 million tons cement during the
year 2007-08 and had earned $450 million, while is expected to
export 11.00 million tons of cement during 2008-09 and earn
approximately $700 million.
Fiscal Performance 2008-09
Business Recorder reported that Pakistan’s cement exports
witnessed a healthy growth of 65%, to over 6 million tons during 7
months of the current fiscal year mainly due to rise in international
demand. The exports may reach to 11 million tonnes and earn
approx $ 700 million during 2008-09.
The statistics of All Pakistan Cement Manufacturers Association also
showed that cement exports had mounted to over 6 million tons in 7
months as compared to 3.62 million tons of same period of last
fiscal year, depicting an increase of 2.38 million tons. Cement
exports during January 2009 went up by 30% to 0.81 million tons as
compared to 0.623 million tons in January 2008.
However, slow construction activities in the country during the
period badly upset domestic sale of cement, which depicted decline
of 15%, to 10.77 million tons as compared to 12.59 million tons of
last fiscal year.
On MoM basis, local dispatches of cement during January 2009
showed a decline of 8%, to 1.51 million tons from 1.65 million tons
of January 2008. Overall dispatches, including export and local
sales, reached 16.77 million tons during July to January of 2008-09
as against 16.20 million tons of last fiscal year, depicting an
increase of 3%.
By September 2009, after witnessing substantial growth in all three
quarters of fiscal year (FY) 2008-09, cement sector concluded the
fourth quarter with a handsome growth of 1,492 percent on yearly
basis, All Pakistan Cement Manufacturers Association’s report
revealed on 29th September 2009.
Higher retention prices (up 59 percent) and high rupee based export
sales amid rupee depreciation (20 percent) drove profits up north.
However, this growth is magnified, as FY2007-08 was an abnormally
low profit period for the sector.
Moreover, the performance is skewed towards large players with
export potential as profitable companies in both years posted
increase of just 109 percent, said analyst at JS Research Atif Zafar.
He said that cumulative profitability of companies in FY09 stood at
Rs 6.2 billion or $78.2 million as compared to Rs 386 million or $6.2
million depicting a massive growth of 1,492 percent. Companies
with profits in both the years posted 109 percent earnings
improvement.
Though total dispatches were down 2 percent, net sales grew by 55
percent to Rs 101.4 billion or $1.3 billion on the back of higher net
retention prices (up 59 percent) and improved export based
revenues. Cost of sales/tonne also rose by 33 percent on yearly
basis amid higher realised coal prices and inflationary pressures,
the analyst maintained.
Production Capacity
In Pakistan, there are 29 cement manufacturers that are playing a
vital role in the building up the country’s economy and contribution
towards growth and prosperity. After 2002-3, most of the cement
manufacturers expanded their operations, and increased
production. This sector has invested about $1.5 billion in capacity
expansion over the last six years.
The operating capacity of cement in 1991 was 7 million tons, which
increased to become 18 million tons by 2005-06 and by end of 2007
rose to above 37 million tones, and currently the production
cpapacity is 44.07 million tonnes.
Cement production capacity in the north is 35.18 million tons (80
percent) while in the south it is only 8.89 million tons (20 percent).
The cement manufacturers in 2007-08 added above eight million
tons to the capacity and the total production was expected to
exceed 45 million tons by the end of 2010. It may result in a supply
glut of seven million tons in 2009 and 2010.
Actual Cement Production (in million tons)
According to Government Board of Investment,
2001-02 – 9.83
2002-03 – 10.85
2003-04 – 12.86
2004-05 – 16.09
2005-06 – 18.48
2006-07 – 22.73
2007-08 – 26.75
2008-09 – 20.28
Exports & International Markets
The cement industry of Pakistan entered the export markets a few
years back, and has established its reputation as a good quality
product. Deregulation after accession of Pakistan to WTO is
expected to open the window of competition from cheaper markets.
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 to avail the opportunity offered, it may secure a
significant share of Sri Lanka market by supplying 360,000 tons of
cement annually.
In 2007, 130,000 tons cement was exported to India.
In 2007, the exports to Afghanistan, UAE and Iraq touched 2.13
million tons.
At present, the economies of major countries are facing recession,
but Pakistan’s cement sector is still maintaining a healthy growth.
Cement export to India has already slowed after imposition of duty
by Indian authorities.

Pricing
Another problem faced earlier by the Industry was the high
taxation. The general sales tax (GST) was 186% higher than India.
The impact of this tax and duty structure resulted in almost 40%
increase in the cost of a cement bag (50 Kg). A bag in India earlier
cost Rs. 160 as compared to Rs. 220 in Pakistan. In the budget of
2003-04, a duty cut of 25% was permitted to the cement sector with
assurance from the cartel to pass on this benefit to the consumers.
In 2006, the price of a bag went up to Rs. 430 however in 2007 it
has stabilized at Rs. 315 per bag. In mid 2008, cement prices
stabilized further at Rs. 220 per bag.
The Government has reduced central excise duty (CED) on cement in
the budget for 2007-08 in order to boost construction activity.
Average industry cost of cement bag/50Kg = Rs.193
Average industry price of cement bag/50Kg = Rs.235
Domestic Demand
Local demand in the country for the year 2008-09 is expected to be
around 20 million tons. Domestic demand is expected to grow at
13% Capacity growth rate (CAGR) during next five years. Certain
factors will also affect the growth of cement industry as well. These
are as follows:

Strong GDP growth

Ø Higher GDP growth has positive impact on cement demand.
Ø Cement demand growth rate was double the GDP growth
rate in last three years.

Housing sector growth

Ø Housing projects consume roughly 40% of cement demand.

Ø Low interest rates, post 9/11 remittances’ inflow, and real
estate boom have helped housing sector growth.

Government Development Expenditures

Ø Government development expenditures count for one third
of total cement consumption.
Ø Increase in PSDP – from Rs.80 bn in 1999 to Rs.520 bn in
2007.
Ø Infrastructure development in a region triggers private
development projects having even positive impact on
cement demand.

Earthquake Rehabilitation

Ø Earthquake losses of October 8th are estimated at $ 5.2bn

Ø Reconstruction work will boost construction material
demand
Ø Reconstruction work is expected to generate cement
demand of 4mn tons over next 3-4 years

Announcement of large Dams

 Ø Construction of four large dams will generate demand of
3.7mn tons. Bhasha Daimer Dam, Munda Dam, Akhori Dam
and Neelum Jhelum.

Per Capita Cement Consumption

Pakistan currently has a per capita consumption of 131kg of

cement, which is comparable to that for India at 135kg per capita
but substantially below the World Average 270kg and the regional
average of over 400kg for peers in Asia and over 600kg in the
Middle East.
Cement demand remained stagnated during 90’s owing to lack of
development activities. In 1997, per capita consumption was 73 kg
in both Pakistan and India. By 2005-06, consumption in India rose to
become 115 kg/capita whereas ours rose to 117 kg/capita. A
comparison of few countries in 2005:
Bangladesh 50 kg/capita
Pakistan 117 kg/capita
India 115 kg/capita
USA 375 kg/capita
Iran 470 kg/capita
Malaysia 530 kg/capita
EU 560 kg/capita
China 625 kg/capita
UAE 1095 kg/capita

Challenges to Cement Industry

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 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 today’s
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