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Crisis in the cement industry

Despite declining cement rates the consumption of cement has remained static in the market

Dec 25 - 31, 2000

After sugar now the cement industry is facing a crisis. The cement industry has hardly rehabilitated itself last year after remaining in turmoil for over 2/3 years. The fresh crisis of the industry which had brought the cement manufacturers on war path against each other is the result of the wrong policies of the government which have failed to provide an even playing field to all the manufacturers.

In the year 1999-2000 the cement industry survived from its earlier crisis of excess production and low demand and resultant under cutting and unhealthy competition. It came out of red because of joint strategy to tailor production to the market requirements. This helped the industry to achieve a price level which not only covered the cost of production but also left some margin of profit to the manufacturers. This agreed sale price was also accepted by the consumers.

The industry is again on the war-path against its own members. The dispute arose in Sept. 2000 when the government levied sales tax on the cement industry. Immediately after, however, the government allowed 4 cement units established in the NWFP and Balochistan extension from payment of sales tax till June 2001. The remaining 19 cement plants operating in Punjab and Sindh who were bound to pay sale tax amounting to about Rs. 20 per bag, could not compete with the four privileged one. These four units Best Way, AWT Cement, Lucky Cement were allowed sales tax exemption under an SR0 issued between 1992 and 96 allowing tax exemption to all industrial units set up in NWFP & Balochistan. The present government allowed this exemption to only cement industries located in these areas till June 2001.

The second major point of difference surfaced when some manufacturers managed to obtain gas connections and shifted production from furnace oil to gas connection which is a cheaper heating substitute. Interestingly, one of the sales tax exempted units also managed to obtain gas connection which further increased the disparity between them and the sales tax paying mills producing cement from furnace oil.

Throughout October and November this year All Pakistan Cement Manufacturers Association demanded withdrawal of sales tax exemption from the four cement plants or grant this exemption to all of them. This exemption, however, was granted for a limited period and cement manufacturers hoped that in the another six months time a level playing field would be restored.

However, success of some cement plants to obtain gas connection for their production is a permanent arrangement and those denied gas connection are perturbed. According to the Chairman APCMA Aziz Sheikh, the impact of furnace oil on the production cost of cement is 30 per cent. Gas consuming mills would reduce fuel cost by more than 50 per cent which would cut their production cost by over 15 per cent.

Majority of the cement plants which could not obtain gas connections have been demanding that gas rates be increased to furnace oil rates for the gas consuming cement plants. Those who have got gas connections are strongly opposing this move.

On protest of the industry the federal government has reportedly decided to raise natural gas tariff for cement industry by at around 100% to bring it at par with furnace oil prices. The government has also directed the Ministry of Petroleum to expedite the supply of gas to other plants who have applied for the connection. The official notification is however, still awaited.

The government, has however not taken any decision to withdraw the sales tax exemption from the four lucky units who have a clear margin of Rs.20 per bag over others. Justice demands that the government should either withdraw this exemption or extend it to all the cement plants.

The other major bone of contention between the cement manufacturers is supply of gas to some manufacturers. Furnace oil has 9,600 calories per kg and its current price to manufacturers in North Rs.12,620 per tonne (excluding sales tax). This works out to about Rs.1,315 per 1000 calories. Sui gas has 853,000 calories per HM3 (cubic metre) and its price is Rs.490 per HM3. The price per 1000 calories thus, works out to Re 0.574 for gas. The users of gas have therefore, a clear advantage of Rs.640 per tonne of cement over the user of furnace oil if the furnace oil consumption is assumed to 90 kg per tonne of clinker. This is a big amount and, naturally, creates a big anomaly in the competitive cost of various manufacturers.

The Best Way cement located in Haripur, NWFP is the lucky one who is enjoying both the concessions. It has gas connection as well as the exemption from sales tax and thus enjoying clear margin of over Rs.50 per bag over its competitors.

A study of the cement industry in Pakistan revealed that the situation is much complex than being painted by either party in this dispute. It was found that gas connection to the mills producing cement through wet process has in fact restored a level playing field for them. These mills, it was found, consumed 100 per cent more furnace oil for cement production than the dry process production plants. These plants were at a disadvantage as compared to the production made by dry process units.

However, the price difference becomes substantial if a dry process plant acquires gas connection. It would virtually eliminate wet process cement manufacturers. The provision of gas connection to sales tax exempted dry process plant would give it huge advantage over all other cement manufacturers.

This is because the four units with a combined capacity to produce 4.599 million tons of cement annually already enjoy cost advantage over 19 sales tax paying cement mills with production capacity of 14.11 million tons. It is pertinent to note that the total annual cement consumption in Pakistan is around 9.6 million tons against 18.7 million tons production capacity of cement industry. All the 23 cement plants pay Rs.1000 per ton CED on cement production while sales tax at the rate of Rs.400 per ton is levied on 19 mills only.

The opponents of increase in gas rates for cement plants argue that the government is committed to converting every production and consumption avenue in the country to gas not only to save foreign exchange on the import of fuel oil but also to reduce the production cost of manufactured production. They said any suggestion of increasing gas rates to furnace oil level is not in the national interest and would discourage manufacturers from converting to gas. Moreover, they added, the mills which have not been provided gas connections as yet would ultimately be connected according to the stated policy of the government. They said a level playing field never existed in the cement industry where some manufacturers were efficient because of their superior plants. Similarly, they added some mills would be come more efficient because of the source of fuel they use in production process.

The opponents, however, insist that they are more concerned about the immediate impact of this phenomenon. They contend that the entire cement industry was already in a bad shape due to low demand and high unutilised production capacity.

From consumer point of view it can also be brought to the notice of authorities that the cement industry in the past had exploited the consumers by forming a cartel and increasing the rates arbitrarily. They enjoyed the support of ruling elite and played havoc with cement rates increasing the rates by over Rs.85 in one go.

Cement price, which hovered around Rs.140 in 1991 before the privatisation of cement plants under government control, were between Rs.165 and Rs.185 in early 1998. As the cement demand decreased in the wake of economic recession these prices went tumbling down to Rs.140 per bag in October 1998.

The cement manufacturers from all over the country then formed a cartel and decided to keep uniform rates of cement throughout the country. They increased the cement rates from Rs. 140 per bag to Rs.225 per bag. These mills refused to accept the orders of Monopoly Control Authority to reduce the rates and got away with it with the tacit support of the then government.

Chairman All Pakistan Cement Dealers Association Asif Saeed said despite declining cement rates the consumption of cement has remained static in the market. He said uncertainty prevails in the market about the rates of cement. The stockists are afraid to maintain high stocks as the rates are declining, while buyers expect further decline in cement rates and are not planning construction in a hurry. However, he said, the dealers are perturbed about the rumours of another attempt to unite the industry and increase cement rates.