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SECTOR OVERVIEW:

Pakistans cement industry has shown tremendous progress since Independence. In 1947,
there were only four operational cement units in West Pakistan with the total production
capacity of approximately half a million tons per annum. Demand during the same period
was estimated at over a million tons. The industry experienced gradual growth as five
plants were set up in the 1950s with a total capacity of 2.8 million tons with four more
set up in the 1960s. These were the
Ayub years when the construction
industry went through a boom as
demand grew because of an expanding
economy and by 1969 the cement
industry of Pakistan had 14 operational
cement plants with an annual rated
capacity of 3.3 million tons.
Following this expansionary phase of
the cement industry, the Economic
Reforms Order of 1972 brought about nationalization of the private sector plants and
resulted in a relatively stunted growth of the industry in the subsequent years.
Nationalization merged state owned plants to form the State Cement Corporation of
Pakistan (SCCP) and this State Cement era lasted from 1972 to 1992. During these
three decades, production increased from 3.5 million tons to a mere 8.4 million tons by
1992 and Pakistans cement requirements were largely being met through exports which
had started in 1977 and continued till 1995.
Government policy moved towards denationalization in 1977-1988 and emphasis was
placed on housing and construction. To meet demand in the 1980s, the government

allowed 7 more units to be set up by the private sector housing a total capacity of 2.54
million tons and 4 plants were set up by the SCCP in the public sector. By the end of this
period 24 cement plants operated in Pakistan. However, there were enormous price
differentials between private and public sector as the SCCP fixed cement prices on the
lower side for the public sector companies.

Through to 1995, local capacity was unable to fulfill local demand particularly in the
north and Pakistan continued to import cement in huge quantities to satisfy need and
some plants closed down in between. Prices in the 1990s were, therefore, high as a result
of import costs and shortage of local cement. With projections for accelerated growth in
demand in the world and local economy, five more plants were set up to gratify cement
requirements locally. However, the local demand did not grow as expected during 1995 to
2000 and the cement sector experienced poor growth rates of 8% per annum. Therefore in
post-industry expansion of the nineties, cement manufacturers had to go through a
problematic period of capacity utilization.
Pakistan began exporting in the years 2001-2002 to utilize excess capacity. Reduced
deficits and focus on infrastructure building (by attracting foreign investors during the
Musharraf years) pumped cement demand growth to approximately 20% in the mid2000s. Existing players increased capacity foreseeing further boom in economy in these
middle years with total production capacity resting at 44.7 million tons of cement as of
the fiscal year 2009-2010.
CEMENT INDUSTRY OF PAKISTAN:
Growth
Cement is one of the most important industries of Pakistan. Limestone and gypsum are
the main raw materials for manufacturing of cement and they are present in abundance in
Pakistan along with ample supply of Natural gas. This great potential makes the country
capable of producing cement not only for local use but also for export as well. Pakistan
has been exporting cement to the neighbouring countries like U.A.E, Afghanistan, India,
Iraq and Russia.
There are 29 cement production units in the country. Upto May 2010, the total installed
cement production capacity is 44.715 million tonnes. By the end of June 2011, the

installed cement production capacity is expected to touch

the level of 49.579 million

tonnes.
Due to political instability and lack of availability of funds for public sector development
program, cement industry of Pakistan was in the recession phase and 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%.
Another 20-25 % growth is expected till the end of the current year. The boost in cement
sector is because of the rising construction activity in the country, reconstruction activity
in Afghanistan and increasing development expenditure by the government.
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. This rising trend continued in the FY08 to FY10
and it is expected to take the same trend in FY11.
Pakistan is rich in cement raw material. Currently many cement plants are operating in
private sector. The last few years have been a golden period for cement manufacturers,
when the government increased spending on infrastructure development. High
commercial activity and rising demand for housing on account of higher per capita
income has made cement sector to take off growth in double digits.
Pakistan cement industry has a huge potential for export of cement to neighboring
countries like India, U.A.E, Afghanistan, Iraq and Russian states. There has been a robust
growth of cement demand seen both in domestic and exports market during the fiscal
year ended June 30, 2009-10. The industry achieved an overall growth of 32% with
domestic demand of cement increased by 24.95% where as exports increased by

111.86%. The overall growth achieved by cement factories for the year under review was
111.29% consisting of domestic and exports markets at 71.02% and 335.12%
respectively.
Pakistan cement industry has been successful to capture export markets of various GCC
and African countries, which are new markets for the country other then conventional
export market of Afghanistan and Iraq.
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.
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 FY11 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 recent wave of flooding in the northern Punjab region of Pakistan and displaced 20
million people and also left the area isolated from other parts of the country. Many
industrial plants and logistics operations were also adversely affected as a result of
massive damage to infrastructure.
Analysts expect that the lack of infrastructure, would lead to a decline in sales and prices
also result in a decrease of RS10 at Rs20 per bag in the next few months. Sales of cement
are influenced by rainfall on an annual basis, but the damage to the road network has
deteriorated and distribution industry, agony and hurt exports.
However, you can expect the industry to see the light at the end of the tunnel, how could
experience exponential growth due to massive reconstruction efforts in the country, once
the flood subsides. Although the extent of the damage can not be accurately assessed at
this time, reconstruction efforts are likely to last longer in comparison with the aftermath
of the earthquake of 2005, due to the nature of the disaster.
Investors will likely have a significant interest in cement stocks on the back of strong
future demand. Even when the government announced a 50 percent reduction in
development spending, the United Nations, World Bank and other donor agencies
pledging money for reconstruction activities.
Cement industries in Pakistan are currently operating at their maximum capacity due to
the boom in commercial and industrial construction within Pakistan. Consumers face a
tough decision with regards to prefer which brand over which because of the similar
pricing of cement industry. The formation of cartel by the cement manufacturers have
exploited local consumers a lot and this has led to the concentrated degree of oligopoly,
where the firms are acting as a single unit to perform their monopoly. Their combined
market power is simply a diluted version of the dominance that a single firm with a

monopoly market share can exert.


The demand of Pakistani cement is expected to continue to grow at the rate of 20 per cent
for about four years to come. It may then follow traditional growth rate of seven per cent
per year. Announcement of major dams will dramatically increase this demand.
Deregulation after accession of Pakistan to WTO is expected to open the window of
competition from cheaper markets.
There may be no tariff after this deregulation on import of cement allowing its entry into
Pakistan from cheaper market at lower rate. Cement from cheaper markets may also
block Pakistans export of cement to its neighboring countries. Global market has
vigorously taken up the advantage of economy of scales and multinational giants now
control more than 40 per cent of world production(China not included). The recent
acquisition of Chakwal Cement by an Egyptian giant, Orascom may be a beginning of
such an entry in Pakistan by multinationals.
New avenues for export of cement are opening up for the indigenous industry as Sri
Lanka has recently shown interest to import 30,000 tons cement from Pakistan every
month. If the industry is able for avail the opportunity offered, it may secure a significant
share of Sri Lanka market by supplying 360,000 tons of cement annually.

Future of cement industry in Pakistan:


The cement demand would increase in future due to Government policies as the Pakistan
Peoples Partys (PPPs) slogan has always been roti, kapra aur makan (bread,
clothing and housing). In this regard a statement of the PPP Government confirmed that it
would encourage industries and construct small dams. Pakistan's economy, PACRA said
grew impressively during last five years with an average GDP growth rate of around 7%.
Cement industry has a positive correlation with the GDP growth rate. The major domestic
demand drivers are public sector development programs (infrastructure), real estate and
industrial construction.
But on other hand there are many factors, which can create problems in Pakistan cement
industry. According to the

experts of Pakistan Credit Rating Agency (PACRA) the

cement sector is currently facing severe challenges which originate from a wide range of
socio-economic risks including contracting economic activities, and high input costs.
These negative developments, along with the prevailing credit crunch and rising interest
rates, have further constrained the industry's prospects.

The encouraging economic environment not only energised the local demand but also
provided momentum for capacity expansion. Resultantly, the industry added significant
capacity recently, while several new production lines are scheduled to commence
operations shortly. During this period, the cement manufacturers also established export
operations by catering to the growing demand of regional economies. This, while
stabilizing the local cement prices, had a positive impact on capacity utilization and
margins. Although the local demand reduced significantly in the first quarter of FY 09
(around 15% decline), strong growth in exports has provided support to the industry in
the form of largely sustained capacity utilization and price stability. However, given the
global export demand is expected to come down.

This would negatively impact the margins and put pressure on local prices that could lead
to a price war among producers. The looming supply overhang scenario in the sector
could potentially worsen the situation. Profitability of the sector has come under pressure
due to high energy cost (comprising around 50% of total raw material costs) and
increasing financial expenses.
Types of Cement produced in Pakistan:
1-

Ordinary Portland Cement (OPC)

2-

Sulphate Resisting Cement (SRC)

3-

Blast Furnace Slag Cement (BFSC)

4-

White Cement