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High hopes – growth of steel, cement under CPEC projects

Cement and steel are building materials used in the construction sector. There are hopes being pinned for high growth of cement and steel industry after the implementation of mega construction projects under China-Pakistan Economic Corridor (CPEC). With CPEC, the domestic demand will witness a sharp surge. The country’s cement industry has the capacity to meet the rising demand of cement for infrastructure projects under CPEC plan. On the other hand, the country faces acute shortage of steel products for construction activity.

The state-owned Pakistan Steel Mills (PSM) is running on the cash lifelines given from the government. The cash-strapped PSM is not in a position to meet even the current steel demand of around 6 million tons per year in the country. It produces up to 1.1 million tons of steel products per annum, meeting 16 percent of the total steel demand of the country. The remaining 84 percent is met through imports. Private companies import more than four million tons of raw materials.

PSM was set up in the early 1970s with the techno-financial assistance of the defunct Soviet Union. The construction of an integrated steel mill, never experienced before in the country, was carried out by a consortium of Pakistani construction companies under the overall supervision of Soviet experts. Spreading over an area of 18,660 acres, Pakistan Steel is strategically located 40km south east of Karachi near port Muhammed Bin Qasim. It produces flat steel products including, billets, slabs, hot rolled coils, cold rolled coils, galvanized sheets/coils/formed sections and corrugated sheets. It is vital to the supply of high quality and cost effective steel products to the domestic market. The revival of the PSM is a major challenge for the present government because of the cash crunch. The decisions like workers` retrenchment and privatization will have political ramifications. Critics say that massive corruption of PSM management and inefficiencies in its procurement and supply chain management policies actually led the state-owned entity to the downturn.

Pakistan is endowed with huge iron ore deposits in Punjab and Balochistan. The country has over 780 million tons of iron ore, which contains 35 percent of iron. With proven resource of around 350 million tonnes, Kalabagh possesses the country’s largest iron deposits. Ironically, the PSM is based on 100% imported ore. It has outdated machinery, which produces expensive steel. Critics say that the country has so far failed to establish state-of-the-art mini- steel mills in areas near iron ore deposits.

Cement sector

Cement is the essential constituent of construction activity. Presently, the total installed capacity of 28 cement plants is 17.312 million tons in Pakistan. The industry witnessed a steady growth rate of 8% until 1994. Before 1994, the country was facing shortage of cement that was met through imports. In 1999, the country’s total production was estimated at 10.384 million tons. In the past three years the cement industry has been facing a crisis situation. With a share of Rs40 billion per year in the GDP, the cement sector contributes Rs15-20 billion per annum to the national exchequer. Pakistan offers great opportunity to capture regional markets due to its geo- strategic location on the confluence of South, West and Central Asia.

 

The current demand-supply situation in the cement sector indicates excess cement production capacity. During the past one decade, the cement manufacturing has been buoyant in Pakistan and the industry has shown tremendous growth in recent years. Owing to the increasing local and export demand due to rising construction activities and regional cement shortages, Pakistani cement sales jumped to exceptionally high. The cement export to Iraq, Iran, India, Afghanistan and UAE witnessed an exceptional growth in the past one decade. Major markets for Pakistan cement exports were Afghanistan and the UAE. The remarkable performance of cement sector was due to the enhanced installed capacity, which had more than doubled during last five years, as well as to the rise in local demand and strong external demand. Pakistan has already been supplying cement to Afghanistan for the last many years. It has been the key player and a traditional supplier of cement in Afghan market. The cement units in northern areas of the country continued to feed the Afghan market by supplying up to 2.5 million tons. Like Afghanistan, Pakistani exporters have been exporting cement to the war-torn Iraq where the demand for cement has been higher for reconstruction work.

The cement sector is likely to get a boost from the tremendous construction activity generated by multi-billion dollar infrastructure projects planned under the CPEC. Gwadar port is the essential part of the CPEC project. No doubt, a huge investment in infrastructure promises a brilliant growth of cement industry of Pakistan. The CPEC involves construction of highways, railways and energy pipelines connecting western China with Pakistan and the Persian Gulf. It will not be incorrect to contend that the CPEC project is going to be a game changer for cement sector.

The main Pakistani cement manufacturers including Bestway Cement, Lucky Cement, and D. G. Khan Cement have set up new plants for further expanding their production capacities. Pakistan produces four types of cements and the raw material- gypsum, limestone, clay/shale used for cement manufacturing is found in abundance in the country. The country is set to rock the world cement market by making its entry in a big way. The country plans to further enhance its production capacity and fully explore the major markets including India, Russia, UAE, Yemen, Sudan, Ethiopia, Algeria and other North African countries for the purpose. Owing to the shortage of cement in the region and rising demand from India and North African countries, Pakistani cement manufacturers are poised to benefit from the current cement boom in terms of high export price.

At present, India and China are enjoying a robust position in the regional markets as both countries are able to offer competitive prices. The cement manufacturers in China and India enjoy state subsidies for exports. The subsidies lower their costs of production. Pakistan needs to offer local manufacturers the similar subsidies for exports to regional markets to make them competitive.

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