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CementinggrowthProspectsforPakistan'scementindustryMarketingAurora

Cementing growth Prospects for

Pakistan's cement industry
Published in Jan-Feb 2016
By Marylou Andrew

For Pakistan's cement industry's growth, much will depend on how

the economy performs and the government responds.
The year 2015 was a busy one
for Pakistans cement industry.
Not only did local demand for
cement increase by 12% in one
year, but four cement
companies (Attock, Cherat, DG
Cement and Lucky Cement)
announced their intention to
increase production capacity.
When these plans reach
fruition (probably in the next
year or so), they will effectively
increase the overall production
of cement by 7.7 million tons
from the current 45 million

Illustration by Creative Unit.

tons to 53 million tons per

annum.

The increase in demand and

planned increase in production capacity have many implications
for the industry; however, to understand them fully, it is essential
to step back and examine the dynamics of this sector.
Despite having an extremely well developed cement industry,
Pakistans per capita cement consumption which stands at 140
kgs, is the lowest in the world the global average is 400 kgs per
capita. Poor economic growth, lack of government interest in
infrastructure projects and high real estate and housing prices
have kept local cement demand fairly low and for many years,
cement manufacturers, especially those based in the south region
(Sindh and Balochistan), have focused mainly on exports.
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(Sindh and Balochistan), have focused mainly on exports.

Manufacturers whose production facilities are in the north (KPK
and Punjab) have shied away from exports due to prohibitively
high costs of inland transportation.
However, in the last six years, the export market has shrunk, so
that whereas the industry exported about 10.98 million tons (26%
of its total production capacity) in 2008, the rst ve months of FY
2015-16 saw this number drop to 2.56 million tons (a mere ve
percent of total production capacity). This reduction in exports
was due to two major factors. One, prohibitively high sales tax and
excise duties (both federal and provincial) make the price of
Pakistani cement uncompetitive in the international market and
two, the drying up of traditionally thriving export markets such as
the UAE and South Africa which have now built up their own
cement production capacities and no longer require cement from
Pakistan. In fact, South African manufacturers recently went to
the extent of persuading their government to impose antidumping duties on Pakistani companies such as Attock, Bestway,
DG, and Lucky in order to protect their own interests.
The impact of lower exports has been especially signi cant on
companies such as Lucky Cement, which over the years has
invested in developing their own terminal at Karachi port as well
as an in-house export eet. Amin Ganny, COO, Lucky Cement, puts
a statistical value on this saying that whereas the company used
to do 40% local sales and 60% exports in 2008, today we export
about 25% of our production whereas rest of the cement we
produce is sold locally.

With the prices of coal (the fuel used in cement

production) in decline from $140 per ton to $70
and now to $52 per ton, the cost of producing
cement is lower and this makes most cement
manufacturers optimistic about the future,
although they are adamant that the government
must reduce sales tax and excise duties to make
the product even more cost effective.
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It is therefore just as well that although exports have dwindled,

there has been an upsurge in local demand. The announcement of
the China-Pakistan Economic Corridor (CPEC), a $46 billion mega
project, which will include infrastructure development projects
across Pakistan and the lowering of real estate prices which has
led to the initiation of several new housing projects - are the two
major reasons for increased local demand.
Mohammad Fazlullah Shariff, CE, Thatta Cement, says that about
60% of the cement produced in Pakistan at present is used in
infrastructure projects, and the housing sector accounts for the
remaining 40%. However, Syed Muhammad Anwar, CEO, Dewan
Cement, is of the opinion that the reverse is true.
Real estate and builders are consuming 70% of cement while 30%
is used in infrastructure.
Irfan Sheikh, Director Finance and CFO, Bestway Cement, tends to
agree with Anwar and says that the lions share of business is
coming from the housing sector. This makes sense considering
that according to news reports from May 2015 (Source: The News),
Pakistan faces a housing backlog of nine million units,
particularly for poor and disadvantaged people and the
government has announced several plans to address this
shortfall.
This combination of increased demand from housing and
infrastructure has in a way forced cement manufacturers to shift
their focus to the local market. Some, like Lucky Cement, initiated
mass media advertising campaigns in 2012 to build up their brand
image not only with contractors and builders who are generally
the decision makers when it comes to choosing a brand of
cement, but also with customers building their own homes.
Others, like Bestway (which is also advertising now), have
introduced new products, such as bonding agents and tile grout in
addition to their existing cement product lines to establish a USP
of sorts for themselves.

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Establishing a USP is not something that cement manufacturers

have paid much attention to in the past, and many still think of
cement as a commodity rather than a product with marketing
potential, and Sheikh strongly believes that because cement has
been selling by itself, companies have simply not bothered with
marketing.
However, considering that cement prices are not xed (they vary
according to quality and consumer perception), local demand is
going to dominate in the future and there will be increased
competition due to an increase in production capacity, there is
now certainly room for companies to market themselves,
regardless of whether they choose to go for a B2B approach or
target end consumers directly.
One way of targeting end consumers directly could be through
bringing about a change in the SKUs. At present, the cement
industry offers loose cement for major builders and contractors,
but the only SKU available to small time consumers of cement (i.e.
those using it to build personal homes or for DIY projects) is the 50
kg bag. Although smaller sized SKUs such as 25 kg and 10 kg are
available in international markets, local cement manufacturers
have not ventured in that direction so far. A reason why, says
Sheikh is the cost of the packaging which is made from imported
kraft paper and costs about Rs 20 per bag for 50 kg of cement.
If you reduce the packaging size to say 25 kg, it would not
automatically reduce your packaging cost by 50%; it may only
reduce it by two to three rupees, and therefore on a per kg basis, it
may become more expensive to package smaller quantities.
Another reason why companies have not worked on new SKUs is

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Another reason why companies have not worked on new SKUs is

due to the fact that it would require a large capital investment to
acquire packing machines for new sizes. However, as the
Pakistani market develops, this may become a viable and
necessary investment.

Marketing, whether in the form of varying SKUs or by investing in

advertising, might also become essential in the future, because
despite increased demand and the signi cant potential for
growth, the industry still faces major challenges. Firstly, the
import of cement from China and Iran through of cial and
unof cial channels poses challenges for local producers and
although the government has imposed a 20% import duty on
Iranian cement, there is still a great deal of supply. Secondly,
Pakistani cement manufacturers still have a surplus capacity of
nine million tons (mainly due to the fact the exports are down)
that still needs to be absorbed in the local market.
Of course, it would be fair to question why manufacturers are
announcing an increase in production capacity when there is still
a surplus that needs to be disposed of. Opinions on the subject
vary.
Shariff believes that the larger cement companies have a lot of
surplus cash and are merely increasing capacity because they
want to invest the money somewhere but I think they havent
really done their homework; they need to undertake a feasibility
report but no one has considered this.
Sheikh, on the other hand, says that it takes on average about 2.5
to three years to set up a new cement plant. By the time the
announced capacities come online, the capacity utilisation of the
industry (currently 77%) will have reached 90% which will be a
very comfortable position to be in. Therefore he believes that this
expansion will start to make sense when that happens.
Of course the huge caveat to all this is the rate of economic
growth on which the cement industry and its future progress
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growth on which the cement industry and its future progress

depends.
Cement consumption has a direct correlation to economic
growth, so if the economy is doing well then cement consumption
will also do well, says Sheikh.
As of now the government is focusing on infrastructure and
housing, but we can only have sustainable growth and an increase
in per capita consumption if this economy continues to grow
beyond seven percent per annum.
With the prices of coal (the fuel used in cement production) in
decline from $140 per ton to $70 and now to $52 per ton, the cost of
producing cement is lower and this makes most cement
manufacturers optimistic about the future, although they are
adamant that the government must reduce sales tax and excise
duties to make the product even more cost effective and ensure
growth over the next few years.
As Shariff points out, cement is an important industry for an
agrarian economy like Pakistan; it generates a lot of employment
and therefore it makes sense for the government to focus on this
industry.

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