Study of Financial and Growth Determinents of Cement Industry

Abstract

Cement industry is one of the largest segments of our industrial sector. The history of cement industry of Pakistan dates back to 1921 when the first plant was established at Wah, district Rawalpindi with an installed capacity of just 44,500 tones per annum by associated cement companies Ltd India. Since more and more cement was needed for the development work and enhanced construction activities of the country, the Pakistan Industrial Development Corporation (PIDC) started work on two cement plants, one at Daudkhel and the other at Hyderabad, both of which started work in 1956. In the mid sixties, the private sector got interested in the cement industry. New plants were set up; cement in Karachi in 1964, which was renamed and was known by Javedan Cement, Ismail Cement at Gharibwal in 1965, now called Gharibwal Cement and Pak Cement at hattar, NWFP in 1967 latter known as Mustehkum Cement. Under the economic reforms order, all the private sector cement plants were nationalized in 1972 and combined with the PIDC plants in 1973 which formed the State Cement Corporation of Pakistan, which controlled all the activities relating to production and distribution of cement in the country. As a result of nationalization, a total of 10 cement units with an installed capacity of 2.8 million tones per annum were transferred to SCCP. During the regime of Nawaz Sharif the industry went through major transformation. The government embarked upon an ambitious privatization program in 1991 and eight units under the control of SCCP were privatized.High cost of furnace oil has been driving cement manufacturing companies in Pakistan to collectively switch over from furnace oil to coal — the low cost firing system of production — showing a major shift in industry strategy. Accounting for nearly 35 per cent of the entire cost of production (furnace oil and power together measuring to 70 per cent), price of that essential fuel greatly determines the financial health of cement companies. Pakistan's largest coal reserves are found in the Sindh Province with approximately 184,123 million tonnes. According to latest IMF data coal prices increased mainly because of higher oil prices which inflated prices of goods. The coal prices vary from $140 to $200 per ton in the world market. The higher oil prices during 2008 resulted in higher freight charges. The ships carrying coals use oil as fuel and the surge in oil prices has increased the cost of transportation. Pakistani cement industry largely depends on coal and use fine coal to extract maximum heat. These stocks of fine coals are imported from abroad while local coal from Quetta is used partially. The statistics made available from the All Pakistan Cement Manufacturers Association (APCMA), which shows that cement export registered a robust increase of 2.48 million tonnes during July-February of the FY07 and it has touched a new mark of 4.261 million tonnes mark as compared to 1.774 million tonne over the same period last year. Huge supply of cement against the low demand has decreased the prices in the local market and due to high competition cement companies are decreasing their prices to capture the market. Presently Pakistan is being exporting cement to Dubai, Afghanistan, Iraq, India, and some other countries. The government’s demand for cement depends upon the budget allocation to PSDP, over the past few years; PSDP has been growing faster than the GDP, which indicates that its share in GDP is also increasing. The federal PSDP as a percentage of GDP was 3.9% in FY06 and is projected to reach 4.3% in FY07. The government is committed to increase this ratio to 6.3% by FY10. This will result in further increase in construction activities and thereby cement demand. Construction of dams is one of the most controversial topics in the cement industry. Hype about a dam construction has historically caused positive interest in cement stocks. However, we believe that their impact on cement demand is somewhat exaggerated. Even the largest planned dam like Kalabagh is expected to consume around 4.5-5mntn over a span of four to five years. This indicates that hypothetically eve if Kalabagh Dam were to commence construction today, it will generate additional cement demand of 1 mntn per year that is not even 5% of the total industry demand. Cement sector has attracted above 80 million dollars foreign investment, depicting an upsurge of 577 percent during the first half of current fiscal year. Presently, cement industry is rapidly growing, driven by growing construction demand at home and abroad, as presently South East Asia region is facing huge shortage of cement. However, Pakistan's cement sector is fully enjoying this supply and demand gap, by getting tremendous export orders from Gulf countries and India. Therefore, local cement sector has also attracted huge foreign investment, which is expected to further rise in the upcoming months. Industry wide capacity determines the demand-supply gap. The demand supply situation reverses periodically. After every three to four years, a round of expansions raises the supply in excess of demand. Demand eventually rises to close the gap and a fresh round of expansions starts. Currently the capacity expansion in the industry that started in FY06 is nearing its end. This suggests that capacity will remain stagnant for the next three to four years. It has been recommended to look into the port charges as port charges in Pakistan are very high as compared with other countries. The excise duty on cement should also be abolished, in case, excise duty cannot be abolished owing to budgetary constraints; same should be phased out over a two-year period.