The start of this millennium was not good for the cement industry of Pakistan. Market growth was in shackles of uncertain economic conditions leading to lack of construction work on the infrastructure projects. However, subsequent opening of the zero rated exports in 2001 to rebuild Afghanistan was starting point and laid foundation for the survival of the cement industry. Opening of the Afghanistan border provided a new vista of sales improving capacity utilization. All these factors and a steady boost in the local demand led the cement industry to unprecedented local market growth and profits since then, especially the last 5 years have been phenomenal in this regard. This period have been a boon for the industry in terms of growth and resulting profits.
This growth of the cement market has very rightly attracted the business savvy investors and industry fellows to go for expansions and as such, the production capacity has been more than tripled from 16 million per annum in the year 2001 to 54 million in the year 2019 and is expected to 62 million tons per annum by end 2019. This is quite extraordinary capacity addition and remarkable by any business standards. Initially this capacity utilization was buoyed by exports to Afghanistan, India and African countries. However, subsequently sales got a strong support from stead fast growth in the local market triggered by various housing and infrastructure projects afterwards supported by China-Pakistan Economic Corridor (CPEC) as well.
Now the question is whether this growth and resulting profitability of the cement industry is sustainable or can lead to challenging market situation for the players in the cement industry of Pakistan. Political stability and socioeconomic position of Pakistan would determine the answer.
Mathematical analyses of this local market’s growth trend would suggest that the industry started this millennium on a promising note with high CAGR of 11.35% during the first five years i.e. 2001 to 2006. However, the industry has maintained an overall CAGR of 7 to 8% during different periods. The industry has a CAGR of 8% since the start of this century i.e. 2001-18, CAGR of 6% during preceding 10 years i.e. 2008-18 and CAGR of 10% during last 5 years. Nevertheless, if we see the CAGR of last three years from 2016 it is gain 7.63%. As such keeping in view our socio economic indicators, we foresee a CAGR of 5 to 6 % in the short run until 2022 and a CAGR of 3.5 to 4% in the long term until 2029 for our national market. This growth rate can increase if the start of mega projects like dams, roads, seaports etc. gets emphasis. This growth rate of 6% in the short term and 4% in the long term, is not bad and would support the sustainable business for the cement industry of Pakistan with intermittent price wars.
If the government, especially the provincial governments empowered by the 18th amendment, would continue investing in the infrastructure projects and the federal government starts its project of 5 million affordable houses, the outlook looks is quite promising for the cement industry. Continuation of work on CPEC projects coupled with the new projects would further boost this demand for cement and it would be an easy sailing for the cement industry even with its expected enhanced capacity of 64 million tons per annum by end 2019. However, a slow down on infra structure projects including CPEC, cut on PSDP or reluctance on ‘Naya Pakistan’ housing project would lead to shrinking demand for building materials. This shrinking demand coupled with upcoming significant capacity additions would have adverse effect on capacity utilization and profits of the cement industry.
If we analyze cement industry in the international backdrop, we would see that approximate cement consumption in Pakistan is 195 kgs per head, which is significantly lower than the global average of 575 kgs/head. However, taking into account the regional consumption pattern, we would see that the consumption of cement is low as compared to 205 kgs/head in India, 350 kgs/head in Sri Lanka and bit high as compared to 175kKgs/head in Bangladesh. Short-term growth rate is expected to remain within 6 % per annum in the region and the Pakistan cement industry would not be an exception to this. However, we expect a stagnant demand once the local consumption of cement would cross 48 million mark. The industry would have to find out and emphasize more on overseas/cross border opportunities to sell its surplus capacities to run at 90% or more of their capacities.
Global cement demand, which is 4.65 billion tons per annum, is also expected to grow at about 4%. Asia-Pacific would be the region mainly contributing to this growth. Rising urbanization and industrialization would be the major factors fueling the demand. The slow growth trend in China, which consumes about 50% of the total consumption, would weaken the overall healthier ex-China demand outlook. Emerging technologies, especially use of alternative fuel and energy efficient technologies would significantly reduce the production cost.
The world cannot ignore the environment impact of the cement production process. China has already going strict on the cement industry in this regard. They have implemented strict environment laws to avoid air pollution. China has planned a 25% cut in the number of cement enterprises by 2020. As such, China may loss 290 million tons of cement capacity in their effort to protect environment.
Cement Industry of Pakistan would also face the challenge of strictly abiding by environment laws to protect the environment. Harnessing appropriate technology for use in cement industry would be necessary rather must to mitigate the environment hazard effects of producing cement. The use of appropriate technology, like computer modeling, dust collectors, gas filters, electrostatic precipitators etc., by the industry would not only reduce on site waste and pollution but would also help the industry to meet legislative requirements as to the environment control. Any enterprise who will not take these environment protection measures seriously is bound to fail in the long term.