The importance of the construction industry in boosting the economy is globally tested and accepted. The increase or decrease in the sales of the cement is typically used as an indicator to judge the economic activity and employment conditions in the country. Even trading of the cement stocks play an important role in determining the Stock Exchange trading trends. Pakistan is presently going through an economic recession caused by various global and local economic factors. In this article, we will discuss the historic trends in the cement industry with forecasts and its potential. We will also briefly discuss how construction industry, especially the cement sector, can contribute to speedy revival of the economy.
Construction sector is an investment led, Labour intensive industry. It generates cash flow and creates jobs. There are around 35-40 construction allied industry those are triggered by an increase in construction activity generating trickle down and trickle across effect on the economy creating jobs. This shows the importance of the construction industry to boost the economy. Cement industry is the workhorse of the construction industry and is a reliable indicator to judge the strength of the economy of a developing country like Pakistan.
The construction industry anticipates a significant activity is not only the infrastructure projects of CPEC, work on Gwadar port but also foresee a lot of potential in the housing sector. Pakistan has a room density of 3.5 persons per room as against 1.1 persons per room in the developed countries. As such, there is a shortage of minimum of ten million housing units in Pakistan. As per the figures given by Chairman of the Association of Builders and Developers in Pakistan (ABAD), 100,000 houses per annum can create one million rotating jobs. Even if we consider it an exaggerated figure, the most conservative estimates suggest it to be 400,000 rotating jobs created by 100,000 housed per year.
Cement industry of Pakistan has witnessed a strong growth in the last 5-6 years and the production capacity of the industry has increased from 44 million tons/annum in 2014 to 59 mill tons in 2019. This is expected to touch 65 million tons per annum in the current financial year. This would be an increase of 50% in the production capacity in just 5 years. If we take into account the upcoming capacities, the total production capacity of the cement industry is expected to touch 75 million tons by end 2022. This huge investment in the cement sector shows the confidence of the investors and the potential of growth in the construction sector.
The sluggish economic activity slowed down the construction activities especially the work on the mega projects leading to a decrease in the local demand of the cement. This, however, now has started recuperating. This recovery of the demand is mostly in the Northern region of the country and Southern markets are still under pressure. The exports to Afghanistan and by sea route to other countries have improved. Sea exports are bullish mainly due to an increase in the clinker exports. The local demand for cement is expected to remain steady during the current financial year and may have a 2% growth by the end 2019-20. But as the production capacities have increased and would further increase during the current year, the prices would remain under pressure. The profits of the cement industry have already started declining and this sales pressure can further aggravate the already started price war. This price war and increasing input costs would further diminish the already fading profits.
Obviously, this would be a major setback for the cement industry, which is used to earning lucrative profits, especially during the last 5 years. Nevertheless, there is not much to worry about as this a routine business cycle for the cement industry to have alternative 5 years cycle of good and slow demand. If we go through the history of the cement industry during the last 30 years,this trend would dominate with just one exception early this millennium. The CAGR of local sales during the years 2004-2009 was 6.5% followed by 2 % in 2009-14 and then again 7.4% during the last five years 2014-2019. We expect a CAGR of 3.5% to 4% in the next five years 2019-2024. With this growth rate and the upcoming significant capacity additions, the sales price would remain under pressure with intermittent price wars.
However, if the construction activities witness a boom and the CAGR climb up to 6% to 7 %, the pressure would soften, as the capacity utilization would improve to 90% in that case.
The export market is also witnessing a mix trend. Various capacity additions are expected around the globe. The global cement capacity is projected to go up to 5.8 billion tons per annum by the year 2024. Interestingly 40% of this capacity additions would be in Asia (Ex China). China is to cut its cement production capacity 70 million tons in 2019 as an environment friendly drive to reduce pollution. New capacities are also underway in Central Asia. To protect their local cement factories, some countries are imposing heavy import duties. South Africa imposed anti-dumping duty on import of cement and now Philippines has imposed a new duty on imported cement.
New regional capacities and business protection measures by importing countries are likely to have negative impact on the cement exports. Clinker exports, however, may witness a consistent growth in the short run.
Environment protection measures
The dynamics of the cement industry have changed globally. Environment protection measures would be at the core of the business survival. A report from the think tank Chathom House claims that cement industry is responsible for 8% the world’s Co2 emission. Cement Industry representatives have ensured environment conference of the UN COP24 held in Poland to lower CO2 emission by 16% by 2030. Cement companies threatening environment would be facing existential threat. Smart companies would have to invest in making their operation environment friendly to ensure long-term survival and using this as a CSR campaign, making it their Unique Selling preposition (USP).
The cement companies of Pakistan may face a short-term commercial challenge in terms of low sales depleting their profits. The test would be to lower the production cost. Most of the companies have understood this and are taking serious steps like installing waste heat recovery plants, efficient machinery etc to lower their manufacturing cost. Companies are also trying to take lead in making their operations environment friendly. Ultimate profitable survival would be for the companies having lower production cost and environment friendly operations to satisfy the regulatory bodies. The industry can sail through these turbulent waves with the help of the government reconsidering the tax rates and incentives for the environment friendly efforts.