Spring :09

Analysis of Pakistani Industries

TERM REPORT

Spring’09

“Cement Industry of Pakistan”

Submitted by:

Hussain Dawood (5429)

Saad Masood Baghpati (5955)

Syed Haider Raza (6014)

Muhammad Adeel (5941)

Ahmed Ashraf (5999)

Section ‘C’ (tue/thur, 12:30-2:00)

Faculty: Dr. Irshad Khan

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Table of Contents

Acknowledgement…………………………………………………………….. 2
Letter of Authorization …………………………………………………………3
Letter of Transmittal…………………………………………………………….4
Introductory Articles…………………………………………………………….. 5
Executive Summary…………………………………………………………….. 12
Intr oduction…………………………………………………………….. ……. 14
History of Cement Industry ..............................................................................…16
Cement Plants in Pakistan ...............................................................................…17
Overview of the Industry ...............................................................................…18
Cement Industry Present Scenario.................................................................….22
Findings and Discussions .................................................................................. ..23
Cement Industry - Porter’s Model .................................................................... ..24
SWOT Analysis ..............................................................................................… 25
Local Demand Drivers ...................................................................................... ..28
Burdens on Cement Sector ............................................................................... ..30
Controversial Issues .......................................................................................…. 31
Geographical Profiles .......................................................................................…33
Issues of the Year...........................................................................................…..37
Companies on the KSE. ..................................................................................... .38
Future Outlook .. ............................................................................................ ..41
Bibliography: .................................................................................................... 44

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Acknowledgement

We would like to express our gratitude to the instructor of t h e c o u r s e , ” Analysis

of Pakistani Industries”, Dr. Irshad Khan for providing us the chance to work on
this project and practically analyze all that we had studied during the semester. This
has definitely been a exceptional learning experience for us. This report has been very
helpful providing us the opportunity to apply the theoretical c o n c e p t s and
e n h a n c e t h e learning of the analytical aspects of the course.

We are very thankful to Dr. Irshad Khan for his guidance and help which he has
extended through out the course a n d h a s m a d e t h e c o u r s e very i nf or ma ti v e ,
educational and also entertaining for us.

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Letter of Authorization

The term report on “Cement Industry of Pakistan” has been authorized by the instructor of
the course ‘Analysis of Pakistani Industries’, Dr. Irshad Khan.

The report is assigned to gain insights regarding the Pakistani cement industry as well as to
critically evaluate the sectoral performance of the cement industry.

The report has proved to be extremely beneficial in terms of enhancing our ability to
perform critical diagnosis of industry trends and potential based on historic performance as
well as develop analytical skills to forecast industry performance in the future based on
economic, political, technological and social forces, thus leading to a better understanding
of the course.

Yours Sincerely,

Hussain Dawood

Saad Masood Baghpati

Syed Haider Raza

Ahmed Ashraf

Muhammad Adeel

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LETTER OF TRANSMITTAL

Dr. Irshad Khan,

We are immensely grateful to you for providing us the opportunity to practically witness
the different concepts regarding the critical evaluation of industrial performance and
sectoral operations.

The lectures have proven to be extremely fruitful in giving us the practical insights and
knowledge regarding the course. Your teaching methodology, which encompasses up-to-
date lectures with a broad spectrum of articles and research cases have been a great
contribution to making the course as interesting as possible for us.

We are sure that, your dedication and commitment towards us being able to develop the
necessary analytical skills will be of great help to us in our careers.

We hope that our effort to complete the report in due time and in a comprehensive and
detailed manner, will reflect in the report and that it will live up to your expectations.

If you have any queries regarding the report, kindly let us know as well would love to clear
any doubts/questions as well as appreciate your suggestions towards this project.

Yours sincerely,

Hussain Dawood

Saad Masood Baghpati

Syed Haider Raza

Muhammad Adeel

Ahmed Ashraf

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'Cement industry to collapse if not rescued': prices already on higher side
MUSHTAQ GHUMMAN

ISLAMABAD (April 12 2009): The country's cement industry is understood to have

conveyed its woes to the government saying that it would collapse if financial benefits
were not extended to it in the next budget. "Reduction in PSDP, high cost of energy, high
interest rate, and Rs 96 per bag tax are some of the reasons of decline in the cement
industry," sources said.

However, analysts term cement manufacturers' claim as an effort to harvest more financial
gains by understating some of the facts, which is challengeable. Recently, the Ministry of
Industries and Production had indicated the possibility of decrease in cement prices as
Advisor to Prime Minister on Finance Shaukat Tarin repeatedly stated in the ECC meetings
that the impact of reduction in prices of coal and other inputs were not being passed on to
the consumers by cement manufacturers.

Cement industry is of the view that the cost of one bag cement, inclusive of all duties and
taxes, is Rs 358, whereas it is being sold at Rs 340, which means that manufacturers are
already facing a loss of Rs 18 per bag. "Without concerted efforts, cement industry will
collapse," sources quoted All Pakistan Cement Manufacturers Association (APCMA) as
saying in its presentation recently given to one of the Finance Ministry's official, who is
personally following the case.

In the presentation, a copy of which is available with Business Recorder, the APCMA has
tried to convince the concerned officials that the industry is about to die, because of taxes
imposed on it. "High inland costs of transportation and port handling make sea exports
non-viable for the plants based in the north, which account for most of 10.59 million tons
surplus capacity," the association said.

On the other hand, Ministry's per bag calculation tells a completely different story.
"APCMA's claimed per bag cost is fictional, and the calculations being carried out by the
Industries Ministry speak the truth," sources said. The Competition Commission of

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Pakistan (CPP) is also in the process of taking action against the cement manufacturers as
the Commission says it has enough proof of cartelization.

The establishment of mobile courts, dropped after charges of their possible abuse for
political victimization, had the objective of keeping a close eye on profiteering, said
Minister for Labor and Manpower Khurshid Shah in an interview. In July last year, the
government intended to launch a crackdown on cement manufacturers against raising
prices to over Rs 400 per 50 kg bag without any justification. But the plan was shelved on
top level intervention.

According to some officials in Finance Ministry, who attended the ECC meeting,
prevailing cement prices are still on the higher side, and the government may fail to contain
inflation if prices of cement and other essential items are not reduced. Cement price in the
federal capital is Rs 349 per 50 kg bag, but in Quetta it is Rs 410 per bag. The CCP, which
was also conducting investigations against cement manufacturers, has already intimated to
the concerned quarters that it was under severe pressure from the cement 'cartel'.

Business Recorder, 2009

Pakistan cement industry seeks alternative overseas markets

Tuesday, 10 Feb 2009

Business recorder reported that Pakistan’s cement industry is seeking an alternate export
market other than India, as it has not exempted the import duty on Pakistani cement, which
is damaging the exports of the sector.

Industry sources said that Pakistan's cement industry has now decided to completely
abandon the cement exports to India citing unfavorable business environment. Exports to
India during January 2009 were recorded significantly lower at 10,000 tonnes, due to the
import duty on cement, which has made the imported cement unattractive in Indian market.
Trade of the commodity between the two countries has also been significantly affected
following the Mumbai attacks hampering the relations between the two countries.
However, cement exports continue to depict healthy growth and were recorded at the level
of 784,000 tonnes during the month, a decent growth of 26% on yearly basis. Cumulative
exports for the first 7 months period from July to January 2009 also witnessed a significant
upsurge of 62% to 5.87 million tonnes versus 3.62 million tonnes in the same period of
2008.
Mr Muhammad Rehan Khan, an analyst at First Capital said that on monthly basis cement
exports registered a growth of 26%. The weight of sea based cement exports during
January 2009 was recorded at 70% in overall cement exports as compared to 68% in the
same month of last year.

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However, the domestic cement demand is likely to record higher volumetric sales during
January 2009 as compared to the preceding month. The double digit growth in monthly
dispatches is due to the lower volumetric sales recorded during December 2008 on account
of lesser working days during the month.

Future of Cement Industry

Ismat Sabir - May, 2008

The cement industry of Pakistan entered the export markets a few years back,
and has established its reputation as a good quality product. The latest information is that India will
import more cement from Pakistan. So far 130,000 tonnes cement has been exported to the
neighbouring country.

The last few years have been a golden period for cement manufacturers, when the
overnment increased spending on infrastructure development. High commercial activity
nd rising demand for housing on account of higher per capita income has kept cement
offtake growth in double

digits.

During the financial year-07, cement sales registered a growth of 31 percent to 17.53
million tonnes as against 13.5 million tonnes sold last year. The cement sales during July-
February-08 showed an increase, both in domestic and regional markets to 18.17 million

tonnes. The domestic sales registered an increase of 7.2 percent to 14.4 million tonnes in
he current period as compared to 13.5 million tonnes last year whereas exports stood at 3.7
million tonnes as against 1.8 million tonnes in the corresponding period last year, showing
an increase of 110 percent.

The cement sector is contributing Rs 30 billion to the national exchequer in the form of
taxes. This sector has invested about Rs 100 billion in capacity expansion over the last four
years. 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 over 87 percent share
in total cement dispatches while the units based in the southern region contributes 13
percent to the annual cement sales.

The cement demand grew 19 percent and 13 percent during FY05 and FY06 respectively.
During the first nine months of FY07-08, production increased by 30 percent as compared
to last year. The demand for cement was forecasted to grow by 26 percent during FY07
and 17 percent in FY08. The per capita consumption of cement has risen from 117 kg in

FY06 to 131 kg in FY07.

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The main factors behind increase in demand of cement were: 60 percent higher Public
Sector Development Projects (PSDP) allocation, seven percent GDP growth, increasing
number of real estate development projects for commercial and residential use, developing
export market and expected construction of mega dams. The operating capacity of

cement in FY05 and FY06 was 18 million and 21million tonnes, which rose to 37 million
tonnes by the end of FY07.

The cement manufacturers added eight million tonnes to the capacity and the total
production was expected to be 45 million tonnes by the end of 2010. It may result in a
supply glut of 11 million, nine million and seven million tonnes in 2008, 2009 and 2010
respectively. Despite an excess supply of 11 million tonnes in 2008, it is estimated

that the price would increase in domestic as well in regional markets that may surely boost
the profitability and give relief to the industry on its new investment.

The cement demand would increase in future due to government policies as the Pakistan
People’s Party’s (PPP’s) slogan has always been ‘roti, kapra aur makan’ (bread, clothing
and housing). In this regard a statement of the new government confirmed that it would
encourage industries and construct small dams.

As cement capacity is increasing to cater the rising domestic and regional demand, it
started facing a tougher time because of price fall after the first quarter of FY06 due to
increase in supply, energy prices started surging and higher expansion led to mounting
finance and depreciation costs. After reaching Rs 430 per bag at the retail level earlier last
year, cement prices fell sharply during 2007.

Average cement prices were Rs 220 per bag as on April 27, 2008, as compared to Rs 315
per bag in 2006. However, 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 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 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.

The export may reach to $ 500 million increase during 2008. Data for the first quarter of
FY08 shows that Afghanistan is Pakistan’s largest cement export market. The prospects for
cement exports seem bright in the medium term due to rising domestic as well as regional
cement demand. Pakistan also achieved improved access to India after the

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complete removal of the 12.5 percent custom duty on Portland cement imports in this
country from January 2007, showing improved export opportunities for Pakistan. India is
planning to import more cement from Pakistan to stabilise prices in the market and the
government wants a balance in demand and supply of cement in the current fiscal year.

The import of cement from Pakistan has increased manifold during last four months. India
has registered a number of Pakistani cement manufacturers, a requirement to facilitate
import of cement. Pakistan has already increased the frequency of trains from one to three
in a week to carry cement from Pakistan to Wagah border. Due to boom in the construction
industry, India needs cement in bulk to meet its growing needs. The success of the sector
depends on exports, its profitability from depressed local prices and cost appreciation. The
exports for FY08 have already surpassed the last whole year’s export of 3.19 million
tonnes and are likely to reach to 6.67 million tonnes in 2008.

The targets for exports for 2009 and 2010 are set to be 9.99 million and 10 million tonnes
respectively. Currently, the export demand is expected to be from new inductee India along
with other countries like Gulf Cooperation Council (GCC) countries, due to rising oil
prices-led economic growth. More countries like South Africa to make the football

stadiums for the World Cup and Sri Lanka are also expected to approach Pakistani
companies for cement imports. However, export depends on factors such as: ability to
produce cement at Rs 85 per bag. Export strategy should be made for at least three years,
2008-10, after which new plant will start production in the region. In the meantime
industry should explore new markets for export or ready to lower prices of cement in local
market.

The sharp decline in cement prices were due to domestic competition among producers has
dampened the profitability of the industry. To cope with this situation the manufacturers
have strengthen cartel to set minimum cement prices. The example was marketing
arrangement that increased cement prices to the extent of 20 percent despite coal

prices have gone down in the international market to $124 from nearly $ 140 in November
2007 to January 2008.

To break-up cartel the Competition Commission of Pakistan raided the offices of

Association of Cement Manufacturers of Pakistan and confiscated computers and office
record. The association condemned this action and said it is against business norms. They
said the commission is blaming cement manufacturers for making a cartel for the last 10
years but could not able to prove it. The capital structure of cement companies may change
as most of the expansions during last two to three years have been debt financed and
companies are expected to retire these debts rapidly during next three to five years.
Moreover, the slow down in economy may occur due to political uncertainty which might
result in reducing cement demand in future. However, in case of construction of hydro-
powered dams, there will be a sudden jump in the local sales of those companies located
near these dams.

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Cement dispatches cross 2.25m MT in March
LAHORE April 4 2007: The month of March has witnessed highest-ever dispatches in the
history of cement industry of Pakistan and both the local and export dispatches were
recorded at 2,281,816 metric tons, as comparing with 1,823,496 of March last year, a
growth of 25.13 percent.

Sources in All Pakistan Cement Manufacturers Association (APCMA) said the figures of
2.1 million tons of cement sales, as reported in a section of press, are not correct and actual
sales have crossed the touched the barrier of 2.28 metric tons.

According to figures available with Daily Times, local dispatches during March 2007 stood
at 1,910,678 metric tons against 1,643,153 metric tons of last year, a growth of 16.28
percent. On exports front, the dispatches were recorded at 371,138 metric tons in March
2007 against 180,343 metric tons of March last year, a growth of 25.13 percent. It may be
noted that the cement industry dispatches had touched the level of 2 million metric tons in
the month of January 2007 but the March figures have registered record levels in the
history of cement industry.

As far as last nine months dispatches are concerned, the local ones have reached to
15,380,297 metric tons against 12,192,840 metric tons of last year, registering a growth of
26.14 percent. On exports side, the dispatches during last nine months have reached to
2,145,487 metric tons against 1,157,250 metric tons during corresponding period,
witnessing a growth of 85.40 percent.

The overall dispatches during last nine months have reached to 17525784 metric tons
against 1335090 metric tons of first nine months of last fiscal year, growing by 31.28
percent.

It may be noted that the cement industry production capacity has reached to the level of 3.3
million tons per annum and the industry experts are predicting some overall 30 percent
growth in cement dispatches by the year-end.

Particularly, both the D G Khan Cement and the Maple Leaf Cement are expected to run
on full capacity by middle of April that would bring further growth to the industry
dispatches.

On exports front, the industry has seen impressive growth and it has shipped 18,600 metric
tons cement to India alone in last month. The industry sources believe that this figure could
be improved further if the government allows by road shipment of cement to India.
Similarly, export to Iraq, Iran, Afghanistan and UAE is growing exceptionally.

Industry sources are of the view that announcement regarding development Lai Nullah

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would also give boost to industry production. They have given credit to President
Musharraf’s consistency in policies behind tremendous growth in industry.

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Executive Summary
Our short research based paper summarizes the key points about what has
been happening in the Pakistan cement industry and what future holds for it, if
the growth continues the same way.
Cement exports of the country continues to depict healthy growth and were
recorded at the level of 913,000 tonnes during the month of November that
triggered massive growth of 61 per cent on year on year (YoY) basis. While,
cumu lative exports for the five months period (Jul-Nov 2008) also witnessed a
significant upsurge of 70 per cent at the level of 4.4 million tonnes versus 2.6
million tonnes in the same period of last year.

The low domestic cement demand in the country is due to the political
unc ertainty. He said cement exports from Pakistan would remain buoyant in
coming future despite the world economic downturn and global financial crisis as
Middle East has still huge demand of cement. Oil producing countries of the Middle
East would require massive housing and construct ion works in years to come
hence, a huge demand of cement is still present. Segregating the data, weight of
sea based cement exports during the month was recorded at 66 per cent in overall
cement exports if compared with 52 per cent in November 2007. Furthermore,
cement exports to India during the month were recorded at 67,000 tonnes, which
is lower when compared with the previous monthly average of 100,000 tonnes.

However, following the recent terror attacks in Mumbai, the Indian cement
industry is now sensing an opportunity to demand a curb on Pakistan cement
imports. In this regard, Indian cement industry is now approaching Indian
government to review its trade talks with Pakistan with respect to cement, which
could probably lead to a decline in Pakistan cement exports to India.

According to the provisional cement data, overall industry dispatches are likely to
witness a decline of 3 per cent during the month of Nov 2008 at 2.5 million
tonnes versus the same month last year.

On cumu lative basis, cement dispatches during the first five months of FY09
(Jul-Nov
2008) is estimated to depict 2 per cent nominal increase at 12.3 million
tonnes as compared to 12 million tonnes during the same period
of last year.

The rise in cumulative cement dispatches is solely attributable to rising export

volumes as domestic demand has remained depressed. Increasing regional
cement demand from countries like Afghanistan, Middle East and African
countries fuelled the export demand growth during the period. Utilisation level

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dropped to 80 per cent of the capacity In November 2008, cement plants of the
country operated at 80 per cent capacity utilisation level as compared to 83 per
cent in the same month of last year. While, overall utilisation levels for Jul-Nov
2008 recorded at 79 per cent as against 78 per cent in the corresponding period of
previous year.

Local demand recovered in Nov on MoM basis: Local demand is likely to record
higher volumetric sales as compared to the previous month. The local
cement dispatches registered an increase of 4 per cent at 1.6 million tonnes
during November 2008 versus 1.5 million tonnes in the previous month. On YoY
basis this represents a heavy decline of 21 per cent.

In aggregate, the domestic cement dispatches for 5MFY09 were recorded at 7.9
million tonnes, depicting a decline of 16 per cent YoY. Segregating the data,
Northern cement manufacturers led local dispatches with 1.3 million tonnes as
compared to 232,000 tonnes for the southern zone during the period under review.

In troduction

Cement industry is indeed a highly important segment of industrial sector that

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plays a pivotal role in the socio-economic development. Though the cement
industry in Pakistan has witnessed its lows and highs in recent past, it has
recovered during the last couple of years and is buoyant once again.

The cement industry in Pakistan has come along way since independence when the country
had less than half a million tones per annum production capacity. By now it has exceeded
10 million tones per annum as a result of establishment of new manufacturing facilities and
expansion by the existing units. Privatization and effective price de control heralded a new
era in which the industry has reached a level of surplus production.

The cement industry in Pakistan faces two serious threats: closure of units based on wet
process, and poor cash flow rendering the units incapable of debt servicing due to
increasing cost of electricity, furnace oil and imported craft paper used for cement packing.
The cost of furnace oil alone has increased by nearly 100%. With the increase in furnace
oil the increase in electricity tariff has also become inevitable.

Pakistan has remained a net importer of cement but due to privatization of units operating
under state control and subsequent expansion programs by new owners supported by
financial aid has pushed the industry to a point where the country is bound to reach an over
supply situation. However, the recent increase in energy cost provides opportunity for the
efficient units based on dry process to sustain the situation for a relatively longer period.

Pakistan’s cement market is divided into two distinct regions, North and South. The
northern region comprises the Punjab, NWFP, Azad Kashmir and upper parts of
Balochistan, whereas the southern region comprises the entire province of Sindh and lower
parts of Balochistan. Traditionally the southern region has always been surplus in cement
production but with the establishment of more plants in northern parts of the country the
region has become almost self-sufficient in supply of cement.

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History of Cement Industry

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The history of cement industry in Pakistan dates back to 1921 when the first
plant was established at Wah. At the time of independence in 1947, there
were four cement factories with an installed capacity of 470,000 tonnes per
annum. These units were located at Karachi, Rohri, Dandot and Wah. In 1956,
Pakistan Industrial Development Corporation (PIDC) established two plants at
Daudkel and Hyderabad and subsequently more plants were established in the
private sector.

The industry was nationalized in 1972 and the State Cement Corporation of
Pakistan (SCCP) was established following the Economic Reforms Order,
1972. As a result of nationalization, a total of 10 cement units with an installed
capacity of 2.8 million tonnes per annum were transferred to the SCCP. Effective
price control was also vested with the SCCP and for a long time the industry
operated under a regime of strict regulation and price control. While the cement
industry was working under state control, the SCCP established five new units
with an installed capacity of 1.8 million tonnes per annum.
In 1985-86, the cement industry was deregulated and private sector was
allowed to establish cement plants. However, bulk of the capacity was
controlled by the SCCP, which had effective control in the fixation of prices.
Severe shortage of cement and price deregulation prompted the private sector to
establish more plants. Seven units were established in the private sector before
commencement of the process of privatization in 1991.

During the regime of Nawaz Sharif, the industry went through major
transformation. The government embarked upon an ambitious privatization
programme and eight units have been privatized so far. The SCCP at present
controls less than 25% of the total installed capacity in the countr y, which is
shrinking with the establishment of more plants in the private sector and
expansion in the privatized units. The units working under the SCCP control are
old and inefficient using 'wet process' whereas the units established in the
private sector are new, efficient and use 'dry process'.
Cement manufacturing is a high capital- and ener gy-inten sive industry. The
capital cost of a 2000 tonnes per day (TPD) plant ranges between Rs. 3.5
billion to Rs. 4 billion whereas the capital cost of a 3000 TPD plant is estimated
at more than Rs. 5.5 billion. Energy consumption by cement manufacturing units
based on 'wet process' is higher as compared to ‘dry processes’. The 'dry process'
is estimated to be economical by 40% to50% compared to 'wet process'.

Cement Plants in Pakistan

S.No Cement Plants in Northern Region Yearly (000 tonnes)

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 Spring :09

1 Associated (Wah) 900

2 D.G. Khan 1710
3 Cherat 720
4 Pioneer 660
5 Mustehkam 660
6 Fecto 600
7 Kohat 330
8 Gharibwal 540
9 Maple Leaf 1460
10 Dundot 480
11 Lucky Cement 1200
Sub-Total 7580

Cement Plants in Southern Region

12 Zeal Pak 880
13 Attock 660
14 Javedan 500
15 Pakland 540
16 Dadabhoy 450
17 Thatta 280
18 Associated (Rohri) 230
19 Essa 150
Sub Total 3690

Plant Expansion and New Cement Plants

Under construction
20 Saadi 960
21 Lucky 1200
22 Army welfare 660
23 Fauji 900
24 Chakwal 1650
Sub-Total 5370
Grand Total 16640

Overview of the Industry

The cement industry of Pakistan entered the export markets a few years back,
and has established its reput ation as a good quality product. The latest

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 Spring :09
information is that India will import more cement from Pakistan. So far 130,000
tones cement has been exported to the neighbouring country.

The last few years have been a golden period for cement manufacturer s,
when the government increased spending on infrastruct ure development. High
commercial activity and rising demand for housing on account of higher per
capita income has kept cement off take growth in double digits.

During the financial year-07, cement sales registered a growth of 31 percent to

17.53 million tonnes as against 13.5 million tonnes sold last year. The cement sales
during July- February-08 showed an increase, both in domestic and regional
markets to 18.17 million tonnes. The domestic sales registered an increase of 7.2
percent to 14.4 million tonnes in the current period as compared to 13.5 million
tonnes last year whereas exports stood at
3.7 million tonnes as against 1.8 million tonnes in the corresponding period
last year, showing an increase of 110 percent.

The cement sector is contributing Rs 30 billion to the national exchequer in the

form of taxes. This sector has invested about Rs 100 billion in capacity
expansion over the last four years. 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 over 87 percent share in total cement
dispatches while the units based in the southern region contributes 13 percent
to the annual cement sales.

The cement demand grew 19 percent and 13 percent during FY05 and FY06
respectively. During the first nine months of FY07-08, production increased by 30
percent as compared to last year. The demand for cement was forecasted to grow
by 26 percent during FY07 and 17 percent in FY08. The per capita consumpti on
of cement has risen from 117 kg in FY06 to 131 kg in FY07.

The main factors behind increase in demand of cement were: 60 percent higher
Public Sector Development Projects (PSDP) allocation, seven percent GDP
growth, increasing num ber of real estate development projects for
commercial and residential use, developing export market and expected
construction of mega dams. The operating capacity of cement in FY05 and
FY06 was 18 million and 21million tonnes, which rose to
37 million tonnes by the end of
FY07.

The cement manufacturers added eight million tonnes to the capacity and
the total producti on was expected to be 45 million tonnes by the end of 2010. It
may result in a supply glut of 11 million, nine million and seven million tonnes
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in 2008, 2009 and 2010 respectively. Despite an excess supply of 11 million tonnes
in 2008, it is estimated that the price would increase in domestic as well in
regional markets that may surely boost the profitability and give relief to the
industry on its new investment.

As cement capacity is increasing to cater the rising domestic and regional

demand, it started facing a tougher time because of price fall after the first
quarter of FY06 due to increase in supply, energy prices started surging and
higher expansion led to mounting finance and depre ciation costs. After reaching
Rs 430 per bag at the retail level earlier last year, cement prices fell sharply during
2007. Average cement prices were Rs 220 per bag as on April 27, 2008, as
compared to Rs 315 per bag in 2006.

However, 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 has been cut by Rs 75 billion and feared
furt her 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 potenti al exporters.

Moreover, this rising trend is expected to be short-lived due to higher interest

rates and inf lationary concerns are likely to make it disadvantageous for
investors to enter the construct ion industry. In addition to this, to control real
estate prices the government is considering imposing a tax on it.

The export may reach to $ 500 million increase during 2008. Data for the first
quarter of FY08 shows that Afghanistan is Pakistan’s largest cement export
market. The prospects for cement exports seem bright in the medium term due
to rising domestic as well as regional cement demand. Pakistan also achieved
improved access to India after the complete removal of the 12.5 percent
custom duty on Portland cement imports in this country from January 2007,
showing improved export opportunit ies for Pakistan. India is planning to import
more cement from Pakistan to stabilize prices in the market and the government
wants a balance in demand and supply of cement in the current fiscal year.

The import of cement from Pakistan has increased manifold during last four
months. India has registered a number of Pakistani cement manufacturer s, a
requirem ent to facilitate import of cement. Pakistan has already increased the
frequency of trains from one to three in a week to carry cement from Pakistan to
Wagah border. Due to boom in the construction industry, India needs cement in
bulk to meet its growing needs. The success of the sector depends on exports, its
profitability from depressed local prices and cost appreci ation. The exports for
FY08 have already surpassed the last whole year’s export of 3.19 million tonnes

20
 Spring :09
and are likely to reach to 6.67 million tonnes in 2008.

The targets for exports for 2009 and 2010 are set to be 9.99 million and 10 million
tonnes respectively. Currentl y, the export demand is expected to be from new
inductee India along with other countries like Gulf Cooperation Council (GCC)
countrie s, due to rising oil prices-led economic growth. More countries like
South Africa to make the football stadiums for the World Cup and Sri Lanka
are also expected to approach Pakistani companies for cement imports.
However, export depends on factors such as: ability to produce cement at Rs 85
per bag. Export strategy should be made for at least three years,
2008-10, after which new plant will start production in the region. In the
meantime industry should explore new markets for export or ready to lower
prices of cement in local market.

The sharp decline in cement prices were due to domestic competition among
producers has dampened the profitability of the industry. To cope with
this situation the manufacturers have strengthen cartel to set minimum cement
prices. The example was marketing arrangement that increased cement prices to
the extent of 20 percent despite coal prices have gone down in the international
market to $124 from nearly $ 140 in November 2007 to January 2008.

To break-up cartel the Compet ition Commission of Pakistan raided the

offices of Association of Cement Manufacturers of Pakistan and confiscated
computers and office record. The association condemned this action and said it is
against business norms. They said the commission is blaming cement
manufacturers for making a cartel for the last 10 years but could not able to
prove it. The capital structure of cement companies may change as most of the
expansions during last two to three years have been debt financed and companies
are expected to retire these debts rapidly during next three to five years.
Moreover, the slow down in economy may occur due to political uncert ainty
which might result in reducing cement demand in future. However, in case of
construct ion of hydro-powered dams, there will be a sudden jump in the local
sales of those companies located near these dams.

The industry achieved an overall growth of 32% with domestic demand of

cement increased by 24.95% whereas the exports increased by 111.86%. The
overall growth achieved by many cement factories for the year under review was
111.29% consisting of domestic and export markets at 71.02% and 335.12%
respectively.

21
 Spring :09

Source: Pakistan Cement Overview of the Cement Industry

– Export of Cement

Pakistan Cement industry has been successful to capture export markets of various
GCC
and African countries which are new markets for the Country other
than the conventional export markets of Afghanistan and Iraq.
Cement Industry Present Scenario

1.) Taxes
• There is no concession on import of raw material or cement
manufacturing
Machinery
.
22
 Spring :09
• Excise Duty: Rs900 per tonne
• Sales Tax @ 16%

2.) Imports & Exports

• Imports: Nil (Custom Duty @ 25%)
• Exports: During FY08, after three slack years, the industry has started
picking up the pace. According to latest dispatches figures from APCMA,
cement exports rose to 5.85 million tonnes during FY07-08 which is 84%
higher than the same period of previous year, contributed 3.18 million
tonnes in total 24.2 million tonnes dispatches.

3.) Investments
• Presently the cost of a new project is around Rs 7.5 billion (Chinese Plant
of 3300 tonnes per day)

4.) Capacity Utilization

• Overall capacity utilization of the industry has increased to 89% during
FY08, as compared to 80.54% in FY07.

5.) Demand & Sales

• In domestic market, the demand also increased substantially. During the
first ten months of 2007-08, cement sector achieved record sales. The sale
raised to 30.107 million tonnes against 24.22 million tonnes as compared
to the same period in
2006-07, an increase of 24%. During March 2008, the sales broke the
previous records and reached to 2.3 million tonnes. Moreover, a record
export of 320,721 tonnes was also registered in the same month. Now the
total sales have reached to
30,107,273 tonnes in the period of FY08 which includes 22,381,563 local
sales and
7,725,710 export
sales.

Findings & Discussions

Cement consumption strongly correlated with country’s core undamentals.

Cement consumption & GDP growth are strongly correlated variables all over the
world. Pakistan has also emerged as one of the developing nations attaining
sustainable growth rates in the range of 5% - 8.5% since FY00. For FY09, we
expect the country to attain GDP growth of 5%.

23
 Spring :09

Capacity Expansion the name of the

Game.

There are 29 cement production units in the country. Up to Aug 2008, the total
installed cement production capacity is 37.156 million tones. Due to political
instability and lack of allocation of funds for public sector development program,
cement industry of Pakistan has come again in the recession phase which had
already registered an average growth rate of 2.96% for the period from 1990 to
2002. For the period from 2003 to 2007 cement industry of Pakistan had registered
an average growth rate of 20% and currently 24.6% growth observed during last
fiscal. The boost in cement sector is because of the rising construct ion activity
in the countr y, reconstruction activity in Afghanistan, new export avenues like
(India, development expenditure by the government.

24
 Spring :09

Cement Industry - Porter’s Model

1.) Entry Barrier:
Entry barriers a r e not too high in the industry. The technology can be easily
imported and setup. The government of Pakistan has also removed duty
from the capital investment and machinery costing over 5 million rupees. The
only constraint is capital which can only be accessed by a big player.

The key barriers would be :

1. Economies of scale, which would favor the bigger players, like Lucky
and DG Khan Cement.
2. Brands are not very critical, but still they play a small role in
consumer preferenc es. Price is the biggest factor.
3. Cost advantage is critical. Companies lying in the South Zone Profile have
a low
Cost and a competitive advantage. The major players like Lucky, Pakistan
Cement, Attock Cement seem to have a similar cost position. Lucky cement
is considered the best in the market.

2.) Supplier Power:

Has a low impact. Mainly limited to coal / power (energy) wherein the
government pricing would have an impact. Pakistan’s Coal is not o f good
quality, s o the c o a l is imported and then used. The import price of coal also
depends upon the prices of fuel as they change month by month. And it is easy to
supply coal in the south zone companies as compared to north.

3.) Buyer Power:

Very low to no impact. The prices are fixed and the massive construction
activities in Pakistan was not able to tumble the prices.

4.) Substitute Product: Almost no

substitute product

5.) Rivalry:
High rivalry in the industry as the industry is still fragmented. Top 4
companies have more than 50 % of the target market. However local players
can have an impact on pricing as cement as the industry depends on local
supply. Cement being bulky is generally not transported from long distance.

SWOT Analysis
25
 Spring :09

Strengths:
1. During the last two years, the Public Sector Development Programme
has been considerably enhanced and this has coincided with greater
demand for cement from the private sector largely for construction
activities in the housing sector.
2. In last few years this sector has shown a constant growth of 16.6% from
year 03-
06 and only in 2007 the rate of growth is
32%.
3. Financial sector reform, increase in worker remit tance, higher
government infrastructure spending and fiscal incentive for the housing
sector will serve as catalyst for higher growth.
4. UNIDO, Chinese experts, and M/S Environmental Resources Management,
U.S.A
is assisting the installation of anti-polluti on measures in the Cement
Industry.
5. The capacity utilization for the sector also improved to 91.32 per cent from
89 per cent last year. Cement exports during the said period have
increased by 40 per cent while the local cement dispatches have grown by
18 per cent.
6. Pakistanis living in other different foreign countries want to invest the
money
they are sending as remittances, into safe and long-term investment
opportunities where real estate sector emerged as a prime choice of
asset class. The direct beneficiary of both these developments is cement
and hence become the Sector in Demand.
7. Restructured debt situation, in a result of co-operation with US
government in different intern ational issues has given Gov ernment
of Pakistan (“GoP”), relaxation in investing more in development
expenditure.
8. The environmentally sound management of sewerage and solid waste is
a core issue in the National Conservation Strategy of Pakistan.
Consequently, National Environment Quality Standards have been
implemented for issues related to this sector. This has led to some concrete
measures; for example the waste problems of cement factories are being
addressed by installing anti-pollution technology.
9. Export to Afghanistan currently growing at 39%, is a relatively and
important
source of revenues for the industry. The strong demand for cement has
clearly affected the bottom line of all cement companies and
encouraged the major players to expand to meet future demand.

Weakness:

26
 Spring :09
1. Major regional cement producers and consumer s- India, Iran and China
are also facing the demand-supply shortages and price hikes.
2. Iran has already placed a ban on cement exports whereas India (like
Pakistan) is also operating near full capacity.
3. There is non-cooperative gesture of the government.
4. Cement prices in the intern ational market are very tight, looking at the
prevailing demand.

5. The government has not taken any step for abolishing excise duty on
cement items, which is clearly negating of the achievement of lowering
prices for the public and for development activities. The taxes still amount
to over Rs 70 per bag.
6. It is quite contrary to APCMA’s recommendations of allowing import of
cement up to 500,000 metric tons on concessional basis as a buffer stock.
The government has perm itted unlimited imports, which can provide
roots for damaging the domestic industry if neighbouring countries start
dumping the commodity into our markets.

Opp ortunity:
1. According to the “Medium Term Development Framework”, the
government will gradually increase its allocation for the Public Sector
Development Program from Rs272b to Rs597b in FY'10, which is likely to
generate furt her demand in coming years.
2. Pakistan has a potenti al to export around 10 million tons at present.
Local production potenti al is estimated at over 40 million tons per annum
over the next few years, there will be need to attract markets like UAE,
Afghanistan, Iraq etc.
3. It is expected that being the US ally, Pakistan would get most of the favor
in order to keep its market share give the fact that all the constructi on
activities in Iraq and Afghanistan would be taken by US.
4. Pakistan’s per capita cement consumpt ion is amongst the lowest in the
region. The government has started massive spending on infrastructure
development- road construction and water management measures etc.,
which was the neglected area in late 1990s due to deteriorated balance of
payment conditions of the country. The country used to spend a major part
of the budget on debt servicing that left no room for development
expen ditures. The situation has almost reversed now. The per capita
consumpt ion is expected to increase phenomenally in coming years, as a
result.
5. Cement: The cement sector will have Rs 164 billion to build on. It will be
able to cash in on a slew of new development projects. Orders are expected
to pour in for the 2,902 schemes connecting farms to market roads,
1,102 schemes for water supply.
6. Aside from development projects the regularization program for Katchi
27
 Spring :09
Abadis is also going to show up in cement profits.
7. Cement industry sources say that even a 20 percent to 25 percent
switchover from brick to cement blocks could lead to an increase in the
sector’s capacity utilization by several percent age points.
8. Presently some of the cement companies from Pakistan are exporting
cement to Afghanistan, Iraq and UAE only to maintain their presence in
these markers. After completion of major expansion plans in Pakistan in
2007, there would be surplus to export in these markets however in the
same period Iran would also be able to approach vigorously these markets
as its most of cement plant will start to come online.

Threats:

a) Key Trigger:
Re formation of cement cartel
Exceptional demand growth ensuring from higher government
spending pre- elections.
Better than expected 3QFY07 results
Beginning of India/Pakistan trade via Wagah border
Ban on Indian exports

b) Key Risks:
Following can be potential triggers and threats for future upgrade or downgrade
for the
Cement industry

• Political instability post 2007 elections

• Delay in construction of Bhasha dam and Munda dam
• More aggressive price controls measured by the government
• Re-emergence of price war

28
 Spring :09

Local Demand Drivers

Pakistan’s domestic cement consumption is driven by two vital factors. 1) housing
needs arising from Pakistan’s burgeoning 1.5% Y-O-Y population growth,
2) federal government’s increased disbursements against apportioned Public
sector development program (PSDP) since FY04.

1) Housing Growth to Spur Consumption:

According to public sector based House Building Finance Corporation HBFC)
figures, an average population per housing units in Pakistan is approximately 8
people per housing unit as compared to global average standard of around 6
persons per housing unit.

In order to meet global standard, the units required for the population of 160
million Pakistanis should be 26.7 million as compared to cur rent housing units of
20 million. We see an increase in per capita income that will accentuate
construct ion of at least 6 million
– 7 million homes. This aspect is facilitated by banking sector’s renewed mortgage
finance business. At present this business is merely less than 1% of GDP in
Pakistan (total size of mortgage liabilities is nearly Rs 55 billion) as against 3% -
4% in neighbouring India. Banking industry is bracing for a target of at least
Rs 300 billion till FY10-11 in the guidance of State Bank of Pakistan and
multilateral International Finance Corporation (IFC).

2) PSDP allocation & disbursement key to cement consumption

Act’s PSDP program accounts to nearly 35% of the total domestic cement
consumption. Government’s increased focus towards infrastructure development
in the country over the last few years has also given impetus to our assertion. It
has been a driver of cement consumpti on in recent years with FY08 PSDP budget
allocation of Rs 520 billion (5.7% of GDP) enunciating a Y-O-Y (Year to Year)
growth of 25%.

Going forward we have assumed 10% growth under PSDP allocations, which is
expected to spur 45% growth in cement consumpti on during FY09. However, risk
to our assertion is lasting political stability in the country at the afterm ath of 2008
elections.

29
 Spring :09
700 30.00
600 25.00
500
20.00
400
15.00
300
10.00
200
5.00
100

30
 Burden on Cement Sector

Presently, the cement industry of Pakistan is heavily burdened due to levy of

Federal Excise Duty which is Rs. 900 per tonne and GST 16% on duty paid price.
In addition to Federal Excise Duty and General Sales Tax, cement industry is also
paying the provincial levies (Royalties and Excise Duties) on acquiring of raw
material for production of cement i.e. lime stone and shall clay. Per tonne cost
impact of these taxes in four provinces of Pakistan is as follows:

Per Ton Cost Punjab NWFP Sindh Balouchistan

Lime Stone 25 23 20 65
Shall/Clay 3 4 3 11

Source:
APCMA

If we compare our taxation and retail prices with other regional countries
revealed that taxation in Pakistan is been highest while cement retail prices were
remain lowest. But now the scenario has changed, local manufacturers are
continuously trying to capture intern ational market because their cost of
production has amplified with respect to
increase in prices of imported coal and devaluated local
currency.
 Controversial Issues

One of the major issues lurking in the market that cement prices are rocketing day
by day and after two or three days 50kg bag of cement makes new high. Yes! It
is true Cement prices making new highs but the situation are created by our
own cement dealers. One lame excuse is expressed by every cement manufacturer
that the coal prices has burdened their cost of producti on and government has
levied with different taxes and Ex-factory price of a 50kg bag has reached to
Rs335 but the selling price of the commodity in the retail market is Rs400 this
situation is created by the name of demand and supply.

According to local cement manufacturer, “Sufficient amount of cement is

produced by the manufacturers but local companies due to high leverage
amounts try to sell their product at high prices to strengthen their financial
statements that is why they are focusing export regions”. But the negative
activities of dealers create panic in the market, in other words sell the
commodity with out paying taxes or in a black market this is another reason of
cement shortage in the city.

1.) Hike in Prices is

F ak e
The existing hike in the cement price as totally unrealistic if we go just two months
back cement bag priced at Rs200 to 220 in February 2008 which has gone up
to Rs380 to Rs400. This surge in prices is not only artificial but dishonest and
illegal and as a result will have a negative impact on the country’s overall
economy; clear reason of an increase in cement price is its unre stricted export.
Almost all the cement manufacturers are exporting their production and
ignoring the country’s requirements.

The cement supply to local market is almost negligible as a result of which the
market is faced with the severe scarcity. The cement industry has to give
first preference to Pakistan as per government policy. Most of the cement
companies has obtained loans amounting to billions of rupees and established
cement units with preference to meet local needs, but this great objective was
pushed behind in the greed for higher profits.

In the Budget 2008-09, government risen GST from 15 to 16 per cent and FED
from Rs750 to Rs900 per ton and this should have a price difference of mere Rs10
to 15 per bag but during the last 45 days Rs100 has been increased which is totally
unjustified.

2.) Capacity Utilization

Low capacity utilization after expansion led to the breakdown of marketing
arrangement increasing the share of larger players in the market and drop in
cement prices. After expansions in FY08, top three cement producers namely
Lucky, D.G. Khan and Pioneer would be able to fulfil about 40% of local
demand. These companies will be better positioned to negotiate their
respective quotas in the arrangement and walk off with higher allocations. The
smaller players are likely to benefit from the recovery in prices after revival of
the marketing arrangement.

3.) Pakistan per Capita

Consumption
Pakistan has current ly per capita consumpti on of 135kg of cement which is
comparable to that for India at 150kg per capita which is one third of China but
substantially below the World Average of 300kg and the regional average of over
400kg for peer in Asia and over
600kg in the Middle
East.

4.) Ranking of Pakistan Cement Sector not

defined
Pakistani Cement Sector is still not in the world ranking because of less per
production capacity and its utilization. Currently there are 29 cement units are
working which are producing 37.15 million tonne per annum. But our
neighbouring countries China and India are on the 1st and 2nd rank with 869
million tonnes and 165 million tonnes per annum in Asia.
 Geographical Distribution of Pakistan
Profiles
1.) North Zone Profile
In our northern region 19 units are engaged in producing marketing and selling
cement and clinker nation wide and abroad. DG Khan Cement, Lucky
Cement Company, Bestway Cement, Maple leaf Cement and Pakistan Cement
remain the major players in terms of sales dispatches from the north zone,
these players have contributed approximately 56% of the total region and
44% is contri buted by other small manufacturers.

FY08 Mar k et Shar e

(Nor th)
DGK
C
Others
18
46%
% LU
CKY
12
%

M LCF
FCCL PIO 12%
5% C
7
%
1.1.) Half Year Erformance
During the period the performance of companies lying in the region
sold 11.3 million tonnes of cement in 6 months period of FY08, which is 31%
higher than 8.6 million tonnes sold in first half of FY07. Export sales jumped
by 165% to 1.96 million tonnes in first half FY08 as compared to 0.7 million
tonnes in the same period last year. Local sales are not much satisfactory as
compare to consecutive period last year only 18% to 9.4 million tonnes upsurge
recorded in the period. Major portion of export sales is contri buted by
1.) Pakistan Cement which is 15.9% to 311,302 tonnes of the total export sales
2.) Lucky Cement 13% (254,841 tonnes),
3.) Askari & DG Khan Cement by 11.1% (217,113 & 217,313 tonnes),
4.) Bestway Cement by 10.7% (209,233 tonnes),
5.) Cherat Cement by 9.6% (187,323 tonnes)
6.) Remaining 28.76% is contri buted by other companies respectively.

On the ground of local

sales
1.) DG Khan Cement is a major contri butor which has contributed
approximately18% (1,694,465 tonnes) in total sales.
2.) Lucky Cement 13% (1,256,200 tonnes),
3.) Kohinoor Maple Leaf Cement by 11% (1,046,560 tonnes),
4.) Pakistan cement and Bestway Cement by 10% (904,563 & 923,357 tonnes)
5.) Remaining 38% contributed by other companies respectively.

1.2.) Annual
Performance
As compare to first half yearly performance, second half remain quiet satisfactory
with respect to sales volume. During 1st half 9.46 million tonnes of cement sold as
compare to 9.66 million tonnes in the 2nd half of FY08. As far as export sales are
concerned total 3.15 million tonnes sold abroad as compare to 1.97 million tonnes
sold in the first six months of FY08 which is 59% higher than the first half. If
we compare Y-O-Y 24.25 million tonnes cement sold from the region against
19.4 million tonnes sold during same period last year.

• DG khan Cement and Lucky Cement remain with the highest dispatches
with 14.4% to (4.238 million tonnes) and 10.3% to (3.09 million tonnes)
respectively.
• Other than the key players Askari Cement, Bestway Cement, Pakistan
Cement and Pioneer Cement contributed with 8.8 million tonnes which is
approximately 29.4% of the total north region sales.

2.) South Zone

 Profile
In south zone currently 10 plants are in operation and producing 7,689,500
tonnes of cement per year. In the region Lucky Cement sharing 31%to 2,400,000
tonnes of the total followed by Attock Cement Pakistan Ltd. which is sharing
23% of the total capacity of cement produced in the zone.

FY08
Ma r
Jav k et LU CKY
edan Sh a r 42%
6% e
(Sout
h)

Dew an
14%
Others
14%
2.1.) Half Yearly Performance
During the period of 6 months Lucky Cement lead the zone and contributed 89%
in the total export sales and sold 904,395 tonnes of cement which is 191% higher
than sales recorded in period of 6 months FY07. The major portion of export
consignment way towards India as lucky cement uses the sea routes to export in a
bulk.

As far as local sales are concerned total local sales done through the zone is decline
by 8% to 1.47 million tonnes in first half of FY08 as compare to 1.59 million
tonnes in the same period last year. During the period Attock Cement Pakistan
limited sold 543,203 tonnes of cement which is approximately 37% of the total
local south zone sales followed by Dewan Cement by 23% to 335,200 tonnes and
Lucky Cement by 14% to 211,660 tonnes respectively.

2.2.) Annual
Performance:
The performance of companies laid in the south zone remain extraordinary,
total 5.85 million tonnes cement sold during FY08 which is 22% higher than the
dispatches made during FY07. Lucky Cement linger as a higher cement seller
of the region with 2.5 million tonnes which is 42% of the total south zone
sales followed by Attock Cement with 1.36 million tonnes and Dewan Cement
with 0.77 million tonnes. From this region one thing to be highlighted most, that
the companies took maximum benefits of sea port

and exported bulk of cement from the site. Lucky Cement exported 2.11 million
tonnes from its Karachi plant which is specifically installed for the purpose of
export sales and Attock Cement has also taken the same benefit.
 Issues of the Year
Price Vs. Coal
Story
During the period FY07-08 cement sector of Pakistan remain under pressure
because of 139% sharp surge in the inter national coal prices Y-O-Y. Coal
contributes approx. 55% to 60% in the manufacturing of cement. It must be kept
under view that Pakistan use to import cement from South Africa and other
African countries which has crossed US$ 160 per tonne and due to devaluated
local currency we have to pay 13% above than the cost. Due to continuous
increase in the prices of coal, retent ion price of cement per bag affected 40%
to 45% and the profit margins of the cement manufacturers on average
dropped by 30%. But cement manufactures has found an alternate of getting their
profits back from the market i.e. export of cement. Year FY07-08 remain very
successful for the cement manufacturers as they started focusing in the
international market, improve their quality and get the licenses of exporting from
India, Dubai, Qatar, Afghanistan, Sri Lanka, Indonesia and now from Bahrain.
Another major hurt that is embossed by the local government is the increase
in CED (Central Excise Duty) from Rs750 to Rs900 which is later stamped on
local consumer by increasing the price of a 50kg from Rs290 to Rs305. Price of
50kg bag was already grew by 29% Y-o-Y from Rs225 to Rs285 because of
continues increase in fuel prices and now cement is available at a price of Rs400
at retail level.
Source: Independent Research
 Companies listed on the KSE
Pakistan Cement Sector, a money-spinning investment opportunity. Cement sector is one
of the most promising sectors at the Karachi Stock Exchange. It comprises of 23 listed
companies:

Cement Companies Listed on the KSE

Symbols Companies Symbols Companies
AACIL Al-Abbas Cement JVDC Javedan Cement
ACPL Attock Cement KOHC Kohat Cement
BWCL Bestway Cement LUCK Lucky Cement
CHCC Cherat Cement MLCF Maple Leaf Cement
DBCI Dadabhoy Cement MLCFPS Maple Leaf (Pref)
DCL Dewan Cement MUCL Mustehkam Cement
DGKC D.G.K. Cement PCCL Pakistan Cement
DNCC Dandot Cement PIOC Pioneer Cement
FCCL Fauji Cement PIOCR Pioneer Cement (R)
FECTC Fecto Cement PKSLC Pak.Slag Cement
FLYNG Flying Cement ZELP Zeal Pak. Cement
GWLC Gharibwal Cement
Ten of these cement companies are currently included in the KSE-100 index based on their
good business performance.

Cement Companies in KSE-100 Index

Symbols Companies Symbols Companies
ACPL Attock Cement PCCL Pakistan Cement
LUCK Lucky Cement PIOC Pioneer Cement
MLCF Maple Leaf Cement BWCL Bestway Cement
DGKC D.G.Khan Cement CHCC Cherat Cement
FCCL Fauji Cement JVDC Javedan Cement

Common Pakistani investors tend to have more inclination towards investing in real estate
rather than in the bonds, stocks and banking products. The country is also going through a
developing stage and numerous public and private construction projects are in the pipeline.
Products of cement sector are always in high demand all over the country, which in turn
strengthens the position of the cement sector at the stock exchange markets. The demand
for cement products transformed into a “demand boom” with the commencement of
reconstruction activities on a huge scale, after the disastrous earthquake destroyed
hundreds of towns and cities in the northern areas of Pakistan.

Moreover, high demand and low supply of cement in South East Asia is also setting the
equilibrium price at a high level. Pakistan cement sector has been cashing in this situation
quite successfully by winning big export deals to meet huge demands of cement in
Afghanistan, Central Asian countries, Saudi Arabia, Gulf, Iraq and India. As a result, the
cement exports have become more than double by moving from 64.36 million dollars to
135.67 million dollars during the first six months of the FY 2008.

Cement sector has been the most attractive investment opportunity in Pakistan for the
foreign investors. It drew above 80 million dollars foreign investment during the first six
months of the current fiscal year. Last year, this amount was only 11.9 million dollars
during the same period. It implies that the local cement sector has seen a tremendous
increase of 577% in the foreign investment during the first half of FY 2008. This enormous
leap is mainly due to increased international demand, but can also be attributed to
improved infrastructure, availability of raw material and cheap labor. Foreign investors put
in their money in order to enhance the production capacity of the companies to meet the
growing demand, as most of the cement manufacturing companies have reached the limit
of maximum capacity utilization in cement production. According to industry sources and
financial analysts, huge increase in the profits of cement sector is expected in the FY 2008.
This sector is showing rapid growth and the earnings are anticipated to go up by 89-90
percent in second quarter of FY 2008.

Cement producing companies have increased the price per bag from Rs. 185 ($3 approx.)
to Rs.220 ($3.5 approx.) recently. This step has improved the earnings of the companies.
Analysts are expecting an annual growth of 22% in the profitability of the cement sector
till 2013. Pakistani stock market has been on the bull-run for the past six years with an
average gain of 47.5%. In spite of the fact that the country was in a state of chaos and faced
havocs one after another during the year 2007, the stock exchange has made remarkable
progress by gaining 40.

It reached its all time high when it closed at 14,815 points on December 26, 2007. Most
interestingly, cement sector outperformed all other sectors at KSE during the year 2007. It
was undoubtedly the most profitable sector at KSE with 47% annual capital return.

Another plus point that predicts a vivid future for the Pakistani cement sector is the fact
that the country is affluent with the raw material needed by the cement manufacturing
companies. With improved infrastructure, it is going to be easier for the companies to take
advantage of the abundant deposits of raw material.

Future Outlook

At the current point cement manufacturers and the government have to take concrete steps
even to keep units in production. On the inputs side, necessary steps are required to contain
the increasing energy cost. The government must also look into the case of providing
subsidy on freight to the exporters of clinker and cement. The prescription is to optimize
capacity utilization.
According to analysts the future of cement exports depends on two factors: surge in cement
prices in the export markets and the government of Pakistan subsidizing freight charges.
While the quantity of exportable cement in the region would gradually decline and prices
are expected to increase, it will take time to get a favorable decision from the government
to provide subsidy even on freight cost. But absence of bulk cement handling facilities will
remain a major deterrent.
Lucky cement which completed its construction at a fantastic speed to qualify for duty
exemptions has met the fate apprehended by the industry experts. Due to various technical
problems including sinking of some foundations, the management was forced to close
down the production soon after starting commercial production. It is feared that it would
not be able to resume production till the first quarter of the next calendar year.
But prospects of recovery of cement industry have been further reduced due to another
recent increase POL prices. Electricity tariff is also expected to be revised upward shortly.
The advantage of devaluation has been eroded almost completely due to increase in energy
cost.
 Installed Capacity
Cement Plants in Northern Region (000 tonnes) per annum
1) Associated (Wah) 900
2) D.G. Khan 1,710
3) Cherat 720
4) Pioneer 660
5) Mustehkam 660
6) Fecto 600
7) Kohat 330
8) Gharibwal 540
9) Maple Leaf 1,460
10) Dundot 480
11) Lucky Cement 1,200
Sub-Total 7,580
Cement Plants in Southern Region
12) Zeal Pak 880
13) Attock 660
14) Javedan 500
15) Pakland 540
16) Dadabhoy 450
17) Thatta 280
18) Associated (Rohri) 230
19) Essa 150
Sub Total 3,690
Cement Plants under Construction
20) Saadi 960
21) Lucky 1200
22) Army welfare 660
23) Fauji 900
24) Chakwal 1,650
Sub-Total 5,370
Grand Total 16,640
 Bibliography:
• Business Recorder www.brecorder.com

• Dawn Newspaper www.dawn.com

• APCMA. All Pakistan Cement Manufacturer’s Association htt p:// apcma.com

• Research Firms

o Invisor
Securities b. DCR
o Jahangir Siddiqui

• Scribd www.scribd.com

• The Economist Intelligence Unit. Country Report Pakistan

www.economist.com

• Lucky Cement Annual Report 2008 htt p://www .lucky-

cement.com/Financialreport%20pdf/01%202007%20to%20June%2030%202008 /A
nnual%20Account%202008.pdf

• Jang Newspaper www.jang.com.pk

• State Bank of Pakistan www.sbp.gov .pk

• DG Khan Cement
htt p:// www .dgcement.com/financial-
reports/AnnualReport2007-08.pdf

• The Oil Drum www.oildrum.com7