Even the cursory look at the performance of Pakistan’ cement industry shows highly erratic performance. Since expansion takes place in cascading manner, industry suffers from surplus capacity and low earnings per share, which improve with the passage of time. The credit for keeping capacity utilization at modest level for all goes to the cartel, which is run by a few groups that control bulk of the installed capacity. The owners continue to thrive, but consumers are forced to pay high price as the regulators are keener in protecting the interest of owners rather than the interest of consumers. The fall out of this apathy of the regulators is that the cost of infrastructure project, mostly constructed by the government, goes up significantly high because of the rise in cement price.
According to the data made public by All Pakistan Cement Manufacturers Association (APCMA), during the first four months of the current financial years, capacity utilization exceeded 93%, from 87% for the full year 2016-17. An interesting observation is that during 2004-17 average capacity utilization hovered from73% to 91%. This significant variation in capacity utilization can be attributed to persistent increase in installed capacity. During this period, installed annual production capacityincreased to 46.39 million tons from 17.91 million tons. Local consumption rose to 35.65 million tons from 14.79 million tons. Exports remained highly erratic, from as low as 1.57 million tons to as high as nearly 11 million tons, but declined to 4.66 million tons at end 2016-17. The real point of concern is that during the period under review surplus capacity rose from 1.56 million tons to as high as 12.13 million tons, but during last financial year reduced to 6 million tons.
According to a report by PACRA, 9 manufacturers are currently busy in expanding installed capacity by 21.7 million tons. Out of this 15 million tons would be added in the North Zone and 6.7 million tons would be installed in South Zone. A point worth noting is that two plants namely D. G. Khan Cement would add 5 million tons and 3.6 million tons would be added by Lucky Cement. The additional capacity would be 48% of the current installed capacity. At present nearly 80 percent cement manufacturing capacity is installed in North Zone and remaining 20 percent is installed in South Zone.
If one looks at export numbers, these indicate that nearly half of the total quantity is being exported to Afghanistan and some quantity to India. Keeping in view the love and hate relationship between Pakistan and Afghanistan, heavy reliance on a hostile neighbor should be a serious cause of concern for the local cement producers as well as the Government of Pakistan (GoP). Some experts say that only Pakistan could offer cement to Afghanistan at the most competitive rate due to being a landlocked country and Pakistan offers the shortest transit time and the lowest freight rate and on top of all a common border. Now Pakistan enjoys three entrance points for Afghanistan. However, hostile attitude of the Afghan government remains completely disappointing as they consider India a friend and Pakistan a foe.
One also needs to understand the logic of bulk of the installed and future capacities being located in the North Zone. Experts say that since one-third of Pakistan’s population resides in Punjab, North Zone is a prudent choice for manufactures. They also say most of the ongoing and future mega projects, including those which are part of CPEC are also located in this Zone. One wonders why South Zone, having huge reserves of ingredients used in cement manufacturing, is ignored. Despite having surplus cement production in the country, export by sea remains un-competitive. It seems an excuse rather than a reality because manufacturing plants have switched over of coal and its prices have declined substantially. Experts say the decline in coal price has not only reduced cost of production in Pakistan, but around the world. They also say that the industry remains heavily dependent on imported coal. This also looks like an excuse because Pakistan has huge coal reserves. They don’t include Thar coal reserve, which is classified as lignite type and termed unsuitable for use in cement manufacturing.
According to an expert, “nearly 50% of the installed cement capacity in owned by about half a dozen groups, which have switched over to cement manufacturing from textiles and clothing. Most of them have acquired state owned at the time of privatization, revamped the existing plant and also gone for extensive expansion. While cement plants were operating under the state control, the country remained net importer of cement due to the contentious problems faced by the public sector entities. Textile tycoons were able to mobilize low cost funds in the name of export refinancing and divert those to cement plants for BMR as well as adding new plants with larger capacities. Three of the large textile groups that control a major chunk of installed cement manufacturing capacity are: Nishat, Kohinoor and Yunus Brothers. They are also undertaking massive capacity expansion program.”
MORAL OF THE STORY
Cement producers, like other manufacturers, complain about high cost of doing business. However, analysts suspect that it is only an effort to seek financial support from the government by an industry that has the surplus capacity to earn additional foreign exchange for the country. Some analysts just don’t accept this point of view (high cost) on the face value. They suggest that the government should undertake cost audit of all the units, irrespective of being small or big. They suspect that cost of production may be high for those plants, which have outlived their life and BMR may not be a prudent choice.