Back on the track
Nov 18 - 24, 2002
Unprecedented increase in furnace oil and electricity prices was the major reason which had almost crippled down the entire cement industry in Pakistan. The low demand of cement due to fall out of overall economic crisis which started after mid nineties also claimed the blooming growth of 7 per cent to a meager level of even less than 3 per cent in the country. Consequently, the entire cement industry was running much below of its capacity despite having a strong industry base, this important sector had to suffer a loss of billions of rupees in the year 1998-99.
The lady luck however started getting kind on this sick unit when the decision makers took some bold and timely decision especially the conversion of the cement industry from oil/gas to coal fired system which proved cost effective in the real sense of the term. Those units which were running in huge losses entirely changed their complexion from losses into profits. However, the conversion of fuel system was not only the major contributor for bringing a turnaround change in the cement sector, there were some other forces which helped bring stability in this important sector. And that was the increase in demand both on local front as well as from war ridden Afghanistan where the international community has undertaken the gigantic task of reconstruction of Kabul and other war affected areas in that country.
In the year 2002, the cement sector has recovered its losses it had to suffer in the past as all the cement units have performed admirably well. The tremendous recovery achieved by the cement industry reflects in the fact that out of the total 22 cement units listed with the stock exchange, 18 have announced their financial results for the year 2002 with an aggregate net earnings of Rs948 million. This tremendous recovery has reverted the cement sector into a profitable zone-certainly a remarkable performance.
Despite being a rich country in terms of the basic components or ingredients required for producing cement i.e. limestone, clay and gypsum, it is unfortunate that the benefit of availability of all these natural resources is not passed on to the consumers. It is the industry which pockets the profit or the government which claims the lion's share in the form of levies or taxation which are said to be the highest in this region. As a result of making the industry as a source of profit or a source of revenue by the owners or the government respectively the end users are the real sufferers. This statement can be substantiated with the fact that a cement bag of 50 kg is being sold at Rs160 in India as compared to Rs220 or more in Pakistan. It is because of high price of construction material, common man of an average income can only dream of owning a house of his own in Pakistan despite the fact that there is an annual demand for 6 million new housing units in accordance with the growth in population. The existing slums and rapidly increasing katchi abadis especially in the urban areas of this country are only because having a house is far beyond the affordable means of the people belonging to average income group what to speak of the people living below the poverty line. It has been a cruel joke with the masses of this country that over the years, people at the helm of affairs never tired to pronounce that the common man the real owners of the resources of the country, but practically speaking all the resources were distributed either on political considerations or to the favourites. Take the example of Karachi where the state land at prime locations allotted to the people belonging to political, religious or social pressure groups at a throw away prices under the amenity clause. Today, these strategically located lands are being used for high commercial gains in the form of hospitals, schools, colleges, marriage halls or marriage gardens. Is there anybody to check why these lands got allotted under the pretext for public welfare is exclusively used for profits and profits alone? As a result of non-availability of land at an affordable price to the common man and high cost of building material including cement the main component for construction, the construction industry had almost come to a stand-still in the major cities. It is estimated that at least 80 affiliated industries were also badly affected due to crisis persisting in the construction industry for the last 6-7 years.
Despite the fact that cement constitutes as one of the basic necessities for shelter, the policy makers have subjected the cement sector to the highest taxation in the region. The levy of General Sales Tax (GST) on cement is Rs660 per ton in Pakistan as compared to Rs320 in India. The excise duty is Rs1000 per ton of the cement which is 186 per cent higher than India where it is Rs350 per ton. In the light of this tax regime, it is said that Pakistan has one of the highest tax rates on cement in the Asian region. The impact of such tax and duty structure has resulted in almost 40 per cent increase in the cement price per 50 kg bag when compared to India suppressing demand for Pakistan cement.
Conversion from furnace oil plants to coal firing system has already taken place in majority of the cement producing units which have started getting high benefits but they are also reluctant to pass on the benefit to the consumer on the pretext that the industry has suffered great losses in the past due to high price of furnace oil hence unless the losses of the past are recovered they are not in a position to pass on the benefit to the end users. On the contrary, the experience shows that whenever the prices of oil were increased the additional cost was always passed on to the consumers; it is however up to the price control authorities to safeguard the interest of the people.
While looking at the conversion process of the cement industry from furnace oil to coal fired system, it comes to notice that Pioneer cement was the first one to convert its cement plant to the coal firing system. During financial year 2001, the company incurred a heavy loss of Rs284 million, which turned into a profit of Rs44 million in the financial year 2002. The conversion of furnace oil plant to coal fired system significantly reduced the production cost of the company resulting in an improved bottom-line. It is reported that the domestic coal is not of a very high quality however the processing and blending the local coal with the imported one can produce required heating content that is much cost-effective than the furnace oil. The increase in coal usage continues to lower the cost of production for manufacturers. Lucky cement completely switched over to coal in late August this year while DG Khan about to shift on the coal technology. Cherat will take a little longer and the company will be able to fully convert to coal in March 2003. The benefit of this change is visible in the increase in gross profit of the cement units.
The annual production of cement in Pakistan comes around 10 million tons while total consumption of furnace account to Rs8.42 billion per annum. On the contrary, the total cost of using coal comes to Rs5.5 billion which translates into a total saving of Rs2.8 billion due to the conversion of the fuel system. Keeping average price of coal per ton with a ratio of 70:30 and furnace oil cost at Rs842 per ton of cement as a benchmark and assuming that the cement plant is fully converted to coal firing system, the saving on cost per ton comes around Rs290. In addition to this the whole cement sector will benefit due to the reduction in production cost. However, the benefit can only be justified and enjoyed when the end users would also be given their due share in the larger interest of the economy, because reduction in price means increase in economic activity.
It may be recalled that in 1947, Pakistan had inherited 4 cement plants having total installed capacity of 0.5 million tons. These four units at that time were controlled by India. These inherited cement plants however were closed when they come to their age after 50 years of their operations. During early 30 years of independence, five cement units were established with aggregate capacity of 3.2 million tons of production. Among these units one was established in Hyderabad Sindh in the public sector. It was called Zeal Pak and was set up in 1956. Another unit in the public sector was known as Maple Leaf which was established in the province of Punjab in the same year. Three units were set up during 1965-66 in the private sector. These were Javedan in Sindh, Gharibwal and Mustehkam in the province of Punjab. After nationalization of industries in early seventies, cement industry remained under the control of government till late seventies. During this period, growth in demand of cement was around 7 per cent per annum, whereas new capacities were not coming up to match with the demand. Consequently, Pakistan had to start importing cement in 1976-77 and continued to import cement till 1994-95.
After the change in the government in 1977, private sector was allowed to establish cement plants. As a result of change in policy, seven projects having capacity of 2.54 million tons were installed in private sector and simultaneously, State Cement Corporation of Pakistan (SCCP) also brought in 4 more units with a total capacity of 1.6 million tons. Resultantly, the total capacity of the cement industry enhanced to the level of 8.5 million tons by the end of 1990.
Those units came in the public sector were Thatta Cement in Sindh, (1983), Dandot(Punjab) 1983, Kohat (NWFP) 1983 and D.G.Khan (Punjab) 1985.
The units allowed in the private sector were Cherat (NWFP) 1985, Pakland (Sindh) 1985, Attock (Balochistan) 1986, Dadabhoy (Sindh) 1988, Essa (Sindh) 1988, Fecto (Punjab) 1989 and Anwarzeb White Cement (Sindh) 1988.
According to a report of ICMAP, in the early nineties, the SCCP was the market leader hence the private sector had to pursue the policies of the public sector in fixing the prices of cement. With more depreciated plants in its fold, combined cost of production of plants of SCCP was on lower side. They had a price mechanism whereby surplus profits of depreciated plants were allocated to the new plants having higher depreciation cost and financial changes. The level of cement prices fixed by SCCP therefore remained on the lower side. With the privatization of cement units after 1990, SCCP lost its control over the supply of cement. At that time there was an acute shortage of cement in the Northern areas of the country. In the first half of nineties, Pakistan had to import cement which led to the increase in cement prices exorbitantly making cement companies to earn very high profits. This tempted some of the existing units like Cherat, Pakland, Dadabhoy, Ac Wah, D.G. Khan, Maple Leaf and Kohat to go for expansion in their plants. Simultaneously, 5 more new projects with aggregated capacity of 5 million tons came on the stream. As such, production capacity went up to 16 million tons by the end of 2000. The five new units in the private sector were Pioneer (Punjab) 1994, Lucky (NWFP) 1996, Askari (NWFP) 1997, Fauji (Punjab) 1997 and Best Way (NWFP) 1998.
According to a survey, the average demand for cement in Pakistan was increased at the rate of 7.2 per cent per annum to 1.97 million tons in seventies. However the growth rate of cement consumption was arrested at the end of 1980 to 6.8 per cent per annum. During nineties, the pace of demand was accelerated to the level of 7.49 million tons which raised the hopes of the industry that the demand will further grow to 14.73 million tons by the end 2000. However the hopes were dashed with the beginning of the economic crisis mainly due to hopeless management of the economy and excessive politicization in the economy and the demand could reach much less than the expectations at a level of 9.91 million tons at the end of 2000. As against the decline in demand, the production capacity of the cement industry jumped up to the level of 16 million tons by the end of 2000 leaving a huge idle capacity of over 6 million tons. The depressed economic conditions taken as the indicator for demand of cement instilled a depressed thoughts amongst the cement industry that under the prevailing conditions there was a little hope for any positive change regarding increase in demand for the cement in the country. However, the proverbial saying ""exception always proves the rules" came true with the turnaround in the industry as stated earlier. Cement consumption is taken as the representative denominator of the state of development of any economy. Per capita consumption of cement in Pakistan works out to 72 kg per head per annum. This level of per capita consumption is rated as one of the lowest in the world. As against 72 kg per capita consumption in Pakistan, the per capita consumption of cement in India is estimated at 89 kg, Sri Lanka 106 kg, Indonesia 139kg, Vietnam 126 kg, Turkmenistan 159 kg, El Salvador 171 kg, Philippines 220 kg, Mexico 251 kg, Iran 274 kg, Syria 369 kg, China 410 kg, Turkey512 kg, Thailand 600 kg, Malaysia 870 kg and Taiwan 1004 kg.
LOOKING INTO THE FUTURE
The radical change in the fuel system that from furnace oil to coal and the increase in demand for cement has lifted the spirits of the industry which should not prove a temporary one. The cement industry in fact in a sense plays the role of a mother industry if all the development of infrastructure base of the country is taken into account. The increase in consumption also pushes the economic activity in an array of affiliated industries especially in the construction related activity. Besides encouraging increase in cement consumption through positive policies and use of cement in large public sector projects, this strong industrial sector deserves incentives through considerable relaxation in government levies to make it competitive in the export market.
Although things are improving but much is needed to be done to sustain the vitality of the sector in the days to come. Diminutive cement exports to Afghanistan did not put a hem on the cement sector as the warlike situation will exists in Afghanistan. With the full conversion of cement sector to the coal firing system, Pakistan could save about $70 million on the import of furnace oil per annum. This would result in a low price per bag of cement and would ultimately encourage domestic demand for cement. However, future prospects for an upturn largely depend upon the construction activities within the country and giving this sector an edge over the competitors in the export market. The annual demand for cement in the neighbouring countries which are not the producers of the cement always offer good prospects for export of cement from Pakistan, provided the government agrees to allow cushion through relaxation in taxes. A comparative study regarding taxes on cement indicates that as against Pakistan where the taxes on cement are 37 per cent, it is nil in Iran, 7 per cent in Thailand, 10 per cent in Egypt, 10 per cent in Philippines, 10 per cent in Indonesia and 18 per cent in India.
Besides current export trend to Afghanistan which has injected a new life in our sick cement industry, there were ample scope of export in the countries like Bangladesh where annual demand for cement is estimated 5 million tons a year, Sri Lanka 3 million tons, Singapore 5 million tons, Egypt 4 million tons, Myanmar 1 million tons, Vietnam 1 million tons, Malaysia 2 million tons and Nepal 0.5 million tons. All these countries are not the producers of the cement and meet their cement needs through imports. Another factor to keep this sector vibrant is to use cement in the construction of the huge national project of Gwadar port in Balochistan, Karachi-Makran coastal highways. The use of cement in the huge network of irrigation canals and new dam projects can also contribute in bridging the gap between demand and supply in the cement sector.