On one hand, many industrialists are worried that giving MFN status to India will ruin their business, as local markets will be flooded by cheap Indian products while, on the other hand, cement manufacturers are optimistic that it would boost cement export to India. Perhaps, this is the only industry that is happy with granting MFN status to India. They said, Pakistan has enough surplus capacity to meet Indian cement demand of construction sector. Therefore, it is likely to enhance its exports manifold to the neighbouring country.
Capacity of cement industry: Cement and concrete are supposed to be synonymous regarding the union of materials, but they are different in nature. The cement is a powder ultra fine ties rock and sand inside a concrete mass and is the main ingredient of concrete. The average annual global production of concrete is about 5 trillion yards or 1.25 trillion tonnes per annum. The local cement industry has a capacity of about 44.217 million tonnes as against demand of about 31 million tonnes consists of 30 per cent exports and 70 per cent domestic consumption, leaving around 10 to 13 million tonnes of surplus capacity that can be utilised for export.
Historical background: 3000 BC, Egyptians used mud mixed with straw to bind dried bricks. They also used gypsum mortars and mortars of lime in the pyramids. Chinese used cementitious materials to hold bamboo together in their boats and in the Great Wall. In 1900, Basic cement tests were standardized; 1903, the first concrete high rise was built in Cincinnati, OH and in 1936, the first major concrete dams, Hoover dam and Grand Coulee dam, were built. In 1947, Pakistan inherited four cement plants with a total capacity of 0.5 million tonnes. Some expansion took place during 1956-66, but could not keep pace with the fast economic development and the country had to import cement in 1976-77 and continued to do so till 1994-95. During 1948-58, two more cement units were set up and the capacity reached 1,036k tonnes. The number of unit further rose to 9 during 1964-69 and the capacity also rose to 2,162k tonnes. Up to 1986-87, about 20 cement units were producing 7,072k tonnes cement. In 1997-98, 24 cement units were manufacturing 9,364k tonnes cement. Later on by expansion in capacity the production rose to 44,070k tones, with 25 units, and estimated to reach 50,000k tonnes in 2011.
The industry was nationalised by Mr Z A Bhutto in 1972 and privatised in 1990 by General Zia-ul-Haq, which encouraged setting up new plants. The increased capacity resulted in severe competition between cement manufacturing companies led to price war, particularly among the units situated in the same region.
Top cement producing countries: In 2006, world total production was2,540 million tonnes and top 6 cement producing countries were Italy, South Korea, Japan, USA, India and China.
Per capita consumption: The average per capita cement consumption in different countries in 2008 was as follows: Bahrain 300, Kuwait 659, Oman 1,678, Qatar 4,710, Saudi Arabia 1,625, UAE 5,098 and GCC average 2,345 kg.
Export: Low cost Chinese cement has captured a large portion of Asian markets. The world’s leading cement exporting countries, such as China, Thailand, Japan, Taiwan and Pakistan are located in the same region. Therefore, in future, only those manufacturers could survive, in the long run, who are benefiting from low cost energy resources selling high quality cement at low prices. According to economic survey, presently, Pakistani cement is being exported to Afghanistan, India, Africa, Middle East and Central Asian countries. The country has already exported bulk of cement to Afghanistan, but export to India was only a fraction of it.
Taxes and Duties: Export of cement is exempted from the sales tax and Federal Excise Duty (FED). However, the domestic sale has to pay the sales tax at the rate of 17 per cent and Federal Duty (FED) Rs700 per tonne.
The import of cement and coal used as fuel for the cement plants is allowed at zero per cent customs duty and 17pc sales tax. As per investment policy of the government, the import of plant machinery and equipment for manufacturing sector is allowed at 5 per cent customs duty. However, in spite of all these concessions, average retail price of cement in the domestic market is gradually increasing since June 2010. Average prices in Pakistan are around Rs417 per 50 kg bag in the northern areas and Rs401 per bag in the southern region.
Cement prices in Indian market ranged IRs270 to IRs280 per bag; however, if cement is imported from Pakistan, the landed cost of import is lowered to Rs235 per bag i.e. 16 per cent less than local price. As opposed to Pakistan, India has a differing supply and demand situation. The cement industry in India is facing challenge of bridging demand and supply gap. India has 300 small and 130 large units with a capacity of 234 million tones, but produced 167 million tonnes. There has been an acute shortage of cement in the Indian market, but importing cement from Pakistan takes at least 15 days for delivery, which is sold on cash basis.
Local cement manufacturers are exporting cement to India through trains only. Therefore, only a limited quantity of cement could be exported to India. If India allows cement imports from Wagah border, it would be more beneficial for the units of northern area, like DG Khan, Lucky, Maple Leaf, Gharibwal, Bestway and Pioneer Cement. These units would bear less transportation cost, which would result in improving export margins. The cement exports to India through Gujarat port would benefit southern cement units Pakistan as they are located near to the sea port.
Out of the total, 44.217 million tonnes capacity, 80 per cent is situated in the North and 20 per cent in the South of the country. During 2010-11, domestic demand was only 22.002 million tonnes and exports were 9.419 million tonnes, thus leaving substantial capacity to be utilised. The production of cement during Jul-Mar 2009- 10 was 23.1k tonnes and in 2010-11 was 20.8k tonnes, showing a change of -9.7pc.
APCMA demands payment of inland freight subsidy: All Pakistan Cement Manufacturers Association (APCMA) has demanded that the government should clear payments of inland freight subsidy claims and facilitate the industry in exporting cement. They said local demand is stagnant for the last many months and units are working below capacity showing 12.796 million tonnes idle capacity.
Chairman APCMA, Aizaz Mansoor Sheikh, said that the manufacturers had contacted the government in 2009 to give 50 per cent inland freight subsidy to boost cement exports by sea. The inland freight cost is quite high made impossible for the units to export, especially located in the northern region are unable to compete in the international market, if cement is exported by sea. After wasting six months, Economic Coordination Committee (ECC) and Trade Development Authority of Pakistan (TDAP) allowed inland freight subsidy at the rate of 35 per cent for cement exports by sea but only for the period of March 26, 2010 to June 30, 2011.
Chairman pointed out that after fulfilling all conditions, claims were filed for subsidy to TDAP, but till now claims of Rs269.293 million have not been cleared. It was learnt that the Ministry of Finance has not released any funds for paying the claims. APCMA said they were demanding subsidy to maximize exports via sea and especially to help the cement units located in the north zone.
Presently, Pakistan is exporting cement to Afghanistan and Central Asian States at very competitive prices. However, there are vast opportunities exist to increase exports through sea they could get more export orders, provided the issue of high inland freight cost from upcountry is resolved. It is very crucial that export by sea route should be encouraged, and inland freight subsidy may be extended to the current financial year. This would help not only to earn foreign exchange but would also assist the cement units to solve their financial crisis. APCMA indicated that the loss making mills in the northern zone of the country may not be able to survive for long if they are not facilitated in increasing their exports.
High Profitability: However, an analyst indicated in his report that the rising prices have helped cement industry to earn huge profits, besides covering losses. The industry posted Rs1.619 billion profit after tax in the first quarter of FY12 as compared to the after tax loss of Rs1.056 billion in the same quarter in FY11.
During the first quarter of Y12, cement units improved their financial health significantly, both prices and dispatches were in favour of the manufacturers as they rose 25 per cent and 8 per cent, respectively the analysts said. Companies like Flying Cement, Gharibwal, Kohat, Cherat and Fauji Cement remained on the top five positions in the sector. They grew 383 per cent, 164 per cent, 82 per cent, 66 per cent and 61 per cent, respectively. On the other hand, Lucky Cement contributed 94 per cent to the sector. Lafarge Cement and Maple Leaf shared cumulative loss of Rs536 million.
Due to high prices in the domestic market, manufacturers were interested to sell more in the local market, showing a growth rate of 12 per cent in local dispatches. The exports increased only by 0.21 per cent, said Invest Cap.
The report shows that out of 18 companies, 10 were in profit, seven posted losses while, one was non-operational. These companies have a share of 98 per cent of the market capitalisation. The overall growth of the cement sector was 38 per cent to Rs35 billion as compared to Rs25 billion in the same period last year. The total gross margins improved by 674bps to 23.5 per cent mainly due to the higher retention prices during this period. However, rising cost restricted sector to expand. The cost of cement went up by 27 per cent per tonne because of higher coal prices in international market, up 28 per cent as against to last year, besides energy prices in the country. Operating cost was also rose 49 per cent while financial cost rose by 2 per cent.
The details further revealed that the government aims to increase bilateral trade between Pakistan and India from $2.6 billion to $6 billion that would surely increase cement export.
However, construction activities in winter, Nov-Jan 2011 would be slowed down reducing less quantity of cement import by India. But reduction in export would be compensated by the local demand of Pakistan.
FY11 was a difficult year for cement industry, especially the former half of it, due to the floods of 2010. However, the current fiscal year depicted some improvement in local cement demand because of reconstruction activities while the export side remained weak.
The total cement dispatches for four months of 2011-12 recorded a six per cent increase over the same period last year. A decline in export in this period is being attributed to higher local supply, particularly in the southern region. The government is also focusing on development work as elections are fast approaching that has increased demand of cement.
Export dispatches from the south fell by 23 per cent evaporated the effects of the improvement in the north, and dipping the total exports for the period of Jul-Oct 2012 over 2011.
Manufacturers said that exports have been declining due to low export prices, meeting only variable costs. Consequently, manufacturers have diverted their attention towards selling cement in local markets than exports.
The performance of cement industry in October has been the best in FY12 in terms of both export and domestic demand higher than the previous three months. In spite of a 13 per cent slump in exports via sea to India, the over all exports increased as compared to September 2011.
