An emerging corproate leader


Jan 10 - 16, 2005



The remarkable performance of 20 percent on a YoY basis in cement demand has enabled the cement industry to carve a prominent position among the corporate sector rather as a corporate leader.

In fact, the economy has led the cement sector to grow further as a number of other industries are directly or indirectly linked with construction activities providing a strong support to this booming sector.

Impressive increase in local dispatches during 2004 has moved up by 14 percent coupled with tremendous growth of 160 percent in exports. Accompanied by a renaissance in demand, growing retention prices, re-profiling of debt and conversion to coal-fired system, the sector gives an outlook of greater prosperity in the years to come.

During the first quarter of the financial year 2004-05, cement sales registered a 25 percent YoY growth to 1.14 million tons relative to 1.131 million tons during the same period last year. Local sales have reported an increase of 20 percent while exports have increased by 58 percent. The capacity utilization rate for the first quarter 2004-05 has increased to 93 percent as opposed to the 73 percent last year. It is hoped that growth in cement sales to eventually stabilize over the medium to long term. The supply side of the cement sector is likely to see significant addition in the medium to long-term by enhancing capacities to reach 28 million ton per annum by 2008.

The constant growth in demand gives a sturdy look to the growing sector. Improvements are also visible in cement growth with regard to the government's endeavors towards uplifting the standing of living by providing flattering incentives to promote construction activities. The noticeable escalating growth in the housing sector is attributable to low rates of house financing provided by commercial banks and other financial institutions as they focus towards shaping lifestyles. Not only the government intended to focus on infrastructure but is also seriously working towards construction of new water reservoirs to meet the estimated demand of cement in coming years. By and large it is expected that the cement sector to perform well in current economic scenario as the government has allocated Rs202billion especially for the pubic sector development program.

As mentioned above, sales growth during financial year 2004 registered a mark of 20 percent, translating to an increase in dispatches to 13.634 million tons from 11.41 million tons. During 2004 local dispatches increased by 14 percent, interpreting to an overall figure of 12.516 million tons from 10.979 million tons recorded in the previous year. Exports are enjoying a rise of 160 percent on a YoY basis, depicting in general an amount of 1.118 million tons from 430,000 tons recorded in the previous year.

On an average, the industry is currently working on 93 percent capacity utilization which gives a glimpse of prosperous booming sector.

Currently, the cement industry has been divided into two zones i.e. Southern Zone representing Sindh and Balochistan and the Northern Zone which indicates industries located in Punjab and NWFP provinces.

A break up of the production and sales of two zones reveals that the total sales ratio of the northern zone to the Southern Zone currently stands at 73:27. Total sales in the northern region stands at 10.74 million tons, with an export contribution of 1.07 million tons and local dispatches amounting to 9.67 million tons. The total Northern region sales contribute to 79 percent of total industry sales while exports in this region contribute 98 percent of the total industry exports mainly due to location advantage coupled with low transportation charges while local dispatches contribute to 77 percent of total industry dispatches. The major gainer in this region is DG Khan Cement contributing to 14 percent of the total sales during 2004.


Askari Cement (Wah)

exports 60,025 tons 2004

Askari Cement (NZP)

exports 40,390 tons 2004

Best Way

exports 246,289 tons 2004


exports 191,383 tons 2004


exports ---

D.G. Khan

exports 159,870 tons 2004


exports 113,314 tons 2004


exports 31,795 tons 2004


exports 111,352 tons 2004


exports 117,235 tons 2004


exports 3,100 tons 2004


exports 1,280 tons 2004






Attock Cement

603,975 tons


349,688 tons


260,171 tons


450,442 tons


509,645 tons

Pakistan Slag

60,100 tons


394,644 tons

Zeal Pak

261,078 tons

According to Tariq Hassan Khan, a leading market analyst, the shares of the cement units are expected to reach new heights in the current fiscal year, driven by increase in capital outlay on development projects, dams, barrages and channels. With regard to leadership, the Lucky Cement has emerged as the capacity leader. Lucky Cement existing capacity currently stands at 1.584 million tons per annum which is to be increased to 6.3 million tons per annum showing an overall increase of 4.7 million tons per annum.

DG Khan Cement is the next to Lucky Cement in terms of capacity utilization as this unit is moving along to increase in current capacity of 1.650 million tons per annum to 4.2 million tons per annum by mid 2006.

Maple Leaf is yet another unit which is also on the go with increasing its capacity from 1.5 million tons to 3.7 million tons a year. Fauji Cement is in the process of increasing its clinker production capacity by 500 tons per day.

Meanwhile, the construction activities have grown by 8 percent mainly attributable to low house financing rates.

Currently, the cement sector is one of the hottest and happening sectors on the Karachi, Lahore and Islamabad stock exchanges. During 2004, the price/earning ratio of the sector stood at 34.74x, relative to the market multiple of 11xn which is highly justified as it seems the industry has once again entered its growth stage. Lucky Cement, Maple Leaf, DG Khan and Fauji are the attractive stocks at the capital market.

Pakistan's manufacturing sector continued to maintain its growth momentum during 2004 as the overall manufacturing sector recorded an impressive growth of 13.4 percent against a target of 7.8 percent relative to last year's growth of 6.9 percent. Improvement in the macroeconomic environment, a decline in the cost of capital, the availability of consumer finance at affordable rates, strong growth in exports have been responsible for the unprecedented growth in large-scale manufacturing. Another star performer has been the construction sector registered a growth rate of 79 percent against a target of 5.4 percent as against a growth rate of 3.1 percent recorded in the previous year. Housing and Construction has been identified as one of the major drivers of growth of cement and the government has taken various budgetary and non-budgetary measures to boost the housing sector which is evident by observing construction activities in the country as they improved from 1.9 percent to 3.2 percent during the said period.

The government had previous reduced CED on cement by 25 percent, which now stands at Rs750 per ton. In the current federal budget no further reduction was recognized as the cement sector is operating at 93 percent capacity utilization, which had also led to reduction in cost.



The reduction of Rs250 is quite visible in the bottom line of companies. Furthermore, the government has also provided a relief on limit of taxable income, where previously it was increased from Rs60,000 to Rs80,000 through Finance Ordinance 2002, now consider the rate of inflation and in order to provide relief to the lower income group it has been raised to Rs100,000. Increase in the limit of property income for the purpose of withholding tax has been enhanced to the limit of Rs300,000. In the backdrop of these incentives it is hoped that purchasing power and housing finance in the economy is likely to improve during the current year.

Construction of dams and barrages are expected to come around soon, as the shortage of water is felt by both the population and the farming sector. However, Pakistan is likely to face a shortage of water to irrigate its winter crop because of lower than expected monsoon rains in July last and delayed snow-melting which has reduced water levels at country's two main water reservoirs. The requirement of cement for the proposed Kalabagh and Bhasha dam approximates to 1.5 million tons to 2 million tons of cement the dams are being constructed in the vicinity of the Northern region, the Kalabagh dam would have a storage capacity of 6.1 million acre feet and a power generation capacity of 3600mw. The Bhasha dam would have a storage capacity of 7.3 million acre feet and power generation capacity of 4500mw, Akhori generation capacity is just 600mw, Katzara Skardu dam would have a storage capacity estimated at 35 million acre feet and power generation capacity of 3500 mw. Bhasha dam would be situated in Chilas. The cost of Kalabagh dam is currently estimated at $5.65 billion, Bhasha $6.7 billion and Akhori $1.6 billion. The northern cement units have an advantage in participating in these projects as it translates into lower transportation cost. With capacity expansions and production increases, the unit is to witness extensive upsides in their bottom-line in the coming years.


The management of cement units has been continuously focusing on reduction in cost of sales and financial charges. The coal conversion process was adapted in the year 2003 in order to tackle this problem. The conversions from furnace oil to cheaper coal-fired system have enabled cement producing units to save up to a maximum of Rs300 per ton on an average.

Currently, coal prices stand at $70 per ton inclusive of C&F value and fuel prices stand at Rs17,000. These conversions have saved the units more than 10,000 per ton and nearly all cement producing units in the country have adapted to this conversion. Pakistan has a rich local resource potential her coal reserves are more than 186 billion tons. These reserves include the huge deposits of coal estimated around 175.5 billion tons in Tharparkar, Sindh. Significant coal deposits suitable for power generation are also available at Sonda and Lakhra areas in Sindh, while in the salt range area of Punjab and at several coal fields in the province of Balochistan.

As per the geological survey of Pakistan, following is the breakup of coal deposits in the four provinces of the country:


184m6 billion tons


0.256 billion tons


0.195 billion tons


0.081 billion tons

Pakistan has sufficient reserves of coal, but the fact still remains that most units import coal due to the lower sulphur content. Imported coal per ton ranges between $70-80.

Fauji Cement, DG Khan is some of the units that rely on 100 percent imported coal, whereas on an average the imported to local coal ratio consumption stands at 60:40.


Financial restructuring and debt profiling is the most talked about issue in all cement units. Previously all cements units acquired long-term debt from foreign institutions. Loans were extended on an average mark up of 14 percent. Now with the recent downfall in interest rates, cement units are taking advantage of re-profiling their long-term foreign debts to local debt which are being offered at an average mark up of 3-4 percent. The change has brought about positive results in the long-term valuation of the industry.

Currently, there are 24 cement plants operating in Pakistan with total production capacity of 18 million tons per annum. However, in view of a handsome outlook for the cement sector, some more units are coming up besides expansion in the capacity of the existing units. These developments are likely to enhance the total production capacity at least to over 22 million tons a year shortly.

Among those units which have expansion plans for their existing projects are including DG Khan Cement.

Due to continued enhancement in cement demand locally and for export purpose to Afghanistan, the installation of additional capacity is on the rise to fulfill estimated cement demand of 28 million tons per annum by 2008.

Currently, the total installed capacity of the cement production is 18 million tons per year. In order to tackle the present situation of excess demand, the cement units are engaging themselves in enhancing installed capacity. On an average, DG Khan is running over 90 percent of it's installed capacity, as the northern zone operates at a capacity of 90 percent, as against the southern zone operational capacity of 87 percent. The company has also signed a formal contract with Smidth of Denmark for the supply of a complete 400 million tons per annum coal-fired cement production plan worth $73.48 million which will enhance the overall capacity of 7000 tons per day.

DG Khan cement is moving ahead with forward integration strategies as the company plans to invest Rs60 million by way of equity investment through purchase of shares of Nishat Shuaiba Papers Products company, associated company of the Nishat Group. The company would be a joint venture that would allow for the manufacture and sales of paper sacks for packing of cement. The plant would be set up adjacent to the new cement production line of DG Khan Cement. Integration would bring about profit sharing as well as reduction in the cost of paper bags. At present a 3 ply bag is used for domestic purpose and a 5 ply bag for export purposes.


The tables have turned positively for the Fauji Cement on account of reduction in fuel cost and financial charges. All credit goes towards management's efforts for re-profiling of debts along with decisions to raise the rate of capacity utilization to 96 percent. The company has recorded sales of 832,000 tons for 2004 on a YoY basis, securing 6 percent of total industry sales and 7.8 percent of the northern region sales. For the first quarter of 2005, the company dispatched 0.205 million ton with exports of 0.036 million tons to the neighboring regions.

Restructuring of Debts: Expensive financial charges had taken a toll on Fauji Cement sending it into depression where the first recorded losses on a continued basis since its inception. In 2003, the management of Fauji Cement re-profiled debt where interest rates have fallen from 13 per cent to 3-4 percent. The heavy burdened loans acquired from the Commonwealth and Deutsche Institutions-und Entwick lungssgesell schaft have been paid off in the last quarter of 2004. On the repayment of two other foreign loans which expire in 2005, the company would solely be relying on debt from local institutions which offer an average mark up of 4 percent. The financial charges for the year 2004 dropped from Rs463 million to Rs204 million, translating to a decrease of 56 percent on a YoY basis. These financial improvements have greatly eased the pressures on the company besides improving the cash flow of the company.

Like other cement units, Fauji also shifted from fuel oil to coal based system which has saved approximately Rs10,000 per ton in the cost of production of the company. However Fauji Cement relies on imported coal from South Africa at rate of $75 per ton.


Increase in capacity utilization has put Fauji Cement in a position to export nearly 14 percent of its production to Afghanistan. The company also has potential export to market like Mauritius, Sri Lanka, Bangladesh and the blooming state of UAE. The company's export contributes around 10 percent of total exports in the northern zone and the industry.




This unit is currently proceeding on its journey to increase its existing capacity of 4800 ton per day to 21,000 tons per day as a result of two consecutive expansions. The first phase of