A tumultuous year for the cement industry

The Financial Year 2010-2011 was not fruit full for the cement industry of Pakistan. Sluggish demand in the local market, increased competition in the international markets and a fall in profit margins marked the highlights of the financial year. In addition to this, broken promises from the government, disruption of distribution channels due to floods and increase in raw material (coal) costs further added to the misery of the cement manufacturers. The demand for cement remained stagnant in the local market due to inadequate public spending and negligible private sector spending because of lack of generic economic growth. The government cut down on its Public Sector Development Program (PSDP) by 77 per cent during the financial year. This was mainly because the allocated funds were not utilised properly. On the contrary, the budget for the Fiscal Year 2012 does feed some hope. PSDP has been allocated Rs710 Billion for the year. What remains to be seen is that how effectively would this capital be utilised?
The private sector demand was weak throughout the year. This was due to low per capital income and little investor confidence in the economy. The private sector took on little or no construction activity which forced the players in the industry into severe price competition forcing the manufacturers to sell a cement bag for as low as Rs235 although, later on the manufacturers disciplined their prices which reached the Rs380 per bag mark. During the FY 2011, the domestic dispatches fell to 22 M Tonnes from 23.551 M Tonnes in the previous year, marking a 6.9 per cent decrease. The international market did not provide too much support to the cement manufacturers. In the past the cement industry had gradually clawed its way to becoming one of Pakistan’s major export industries. However, after experiencing years of growth the cement industry had to face a tough year in the international market. In the past cement has been exported to Afghanistan, India, Sri Lanka, China and Africa. However, in the outgoing year there was some increased competition from the Middle East and the cement industry was hit with a fall in cement exports. The cement exports fell by 11.55 per cent from 10,657,235 M Tonnes to 9,426,112 M Tonnes.
Government did not play its part in reviving the cement industry. If 80 per cent of one of your favorite export industries has suffered huge losses, then it is obvious that they are in trouble. The capacity utilisation of the industry was down to 76.21 per cent in the year. Pakistan government had offered to pay an inland freight subsidy which never materialised and the cement manufacturers had to sell their products in the local market at very low costs because the cost of transporting the cement to the harbour for exports was too high. However, the government did reduce the Federal Excise Duty and the General Sales Tax. The minority who did register profits had the advantage of being very close to the harbour and exported most of their produce. During the year, nature also seemed to be harsh on the cement industry. There were massive floods which disrupted all the distribution channels and pegged the economy back. Lack of distribution channels meant that there was disruption in the supply of key raw materials such as coal and limestone and the cement could not be transported over to the market place for sales. In addition to this the input costs of the industry were on a high. Coal is the major energy source for the cement sector and it cost $116.3 per tonne. This was an all-time high. Same was the case with furnace oil and gas.
Currently, the cement industry does look in shatters but there is some reason to be optimistic. The extreme damage caused by floods has to be reconstructed. This is bound to increase the local demand of cement. Urbanisation is also a growing trend in Pakistan and this brings along it the demand for increased construction. The development in Afghanistan is on a rise as well especially after a growing GDP. The cement market should look to capitalise on that.

The writer is London School of Business and Finance graduate who is currently working as an external auditor at KPMG