Pakistan Cement Industry

Compiled by Mirza Rohail B http//economicpakistan. wordpress. com/2008/02/12/ cementumum- pains/ History & Introduction harvest-tide of cement industry is rightly considered a barometer for economic activity. In 1947, Pakistan had inherited 4 cement plants with a total cognitive content of 0. 5 one one million million million million million dozens. 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 bumpy contender between members of the cartel today. The industry comprises of 29 firms (19 units in the northern and 10 units in the sec), with the installed proceeds capacity of 44. 09 million scores. The north with installed production capacity of 35. 18 million net tons (80 percentage) while the south with installed pro duction capacity of 8. 89 million tons (20 percent), compete for the domestic market of everywhere 19 million tons. There are iv foreign companies, three armed forces companies and 16 private companies listed in the stock exchanges.The industry is divided into two broad shares, 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 sphere 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 laid near/within mountainous regions that are rich in clay, iron and mineral capacity.Cement industries in Pakistan are actually operating at their maximum capacity due to the boom in technical and industrial braid within Pakistan. The cement area is contributing above Rs 30 billion to the home(a) exchequer in the form of taxes. Cement industry is also serving the nation by providing communication channel opportunities and presently more than 150,000 persons are employed directly or indirectly by the industry. The industry had exportationed 7. 716 million tons cement during the year 2007-08 and had earned $450 million, while is anticipate to export 11. 0 million tons of cement during 2008-09 and earn approximately $700 million. Fiscal Performance 2008-09 Business Rec gild reported that Pakistans cement exports witnessed a wholesome crop of 65%, to everywhere 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 in all Pakistan Cement Manufacturers Association also showed that cement exports had mounted to over 6 million tons i n 7 months as compared to 3. 2 million tons of a same(p) period of last fiscal year, show 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(prenominal) witnessing substantial proceeds in all three quarters of fiscal year (FY) 2008-09, cement sector concluded the fourth quarter with a handsome gro wth of 1,492 percent on yearly basis, All Pakistan Cement Manufacturers Associations report revealed on 29th September 2009. higher(prenominal) retention equipment casualtys (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 voltage as profit able-bodied companies in both years posted increase of just 109 percent, verbalise 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 boodle 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 hig her(prenominal) 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. mathematical product Capacity In Pakistan, there are 29 cement manufacturers that are playing a indispensable role in the building up the countrys economy and contribution towards growth and prosperity. afterward 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 per cent).The cement manufacturers in 2007-08 added above eight million tons to the capacity and the total production was anticipate 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 disposal 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 much(prenominal) an entry in Pakistan by multinationals. New avenues for export of cement are opening up for the endemical industry as Sri Lanka has recentl y shown touch on 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 give 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 Pakistans cement sector is still maintaining a healthy growth. Cement export to India has already slowed after imposition of duty by Indian authorities. Pricing other 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 comprise of a cement hairgrip (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 natio nal agency from the cartel to pass on this benefit to the consumers. In 2006, the price of a bag went up to Rs. 430 notwithstanding in 2007 it has stabilized at Rs. 315 per bag. In mid 2008, cement prices stabilized further at Rs. 220 per bag. The judicature 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. 193Average 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 result also affect the growth of cement industry as well. These are as follows Strong GDP growth O Higher GDP growth has positive impact on cement demand. O Cement demand growth rate was double the GDP growth rate in last three years. Housing sector growth O Housing projects consume roughly 40% of c ement demand.O Low interest range, post 9/11 remittances inflow, and real estate boom have helped housing sector growth. Government Development Expenditures O Government development expenditures count for one third of total cement role. O Increase in PSDP from Rs. 80 bn in 1999 to Rs. 520 bn in 2007. O Infrastructure development in a region triggers private development projects having even positive impact on cement demand. Earthquake rehabilitation O Earthquake losses of October 8th are estimated at $ 5. 2bn O Reconstruction work will boost construction material demandO Reconstruction work is expected to generate cement demand of 4mn tons over next 3-4 years Announcement of large Dams O 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 substant ially 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 90s owing to pretermit 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/capitaUAE 1095 kg/capita Challenges to Cement Industry The cost and exports may be touch on 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 FY 10 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 condition real estate prices the brass is considering imposing a tax on it. Major General Rehmat Khan, president of All Pakistan Cement Manufacturers Association (APCMA), told Business Recorder, cement industry is getting Rs 24 per ton as day dutydrawback for export of cement which needs to be revised.In view of todays computer science 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, speci al 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 rest 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 custom 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 merchandise coal is zero while on Pet Coke it is charged 5 percent. (c) ECONOMIC PAKISTAN