THE INCREASING DEMAND OF CEMENT

Banking sector lending strong support

By AMANULLAH BASHAR
Aug 11 - 17 , 2003 

The banking sector has come out in a big way in cementing the way of growth for the cement manufacturing sector in Pakistan.The State Bank of Pakistan (SBP) under a policy has allowed the commercial banks to extend financing to the housing and construction industry. As a result to this policy the commercial banks have launched house financing schemes at a massive scale. The commercial banks are now offering house building loan to an extended limit of Rs7.5 million at reasonably low lending rates which is around 10 per cent to an individual. The HBFC in the public sector has also enhanced its advance limit up to Rs5 million.

The involvement of the commercial banks at such a large scale in house building schemes, is expected to gear up the construction activity, bridging the gap of housing units and above all generating the economic activity at a larger scale.

In fact, the participation of the commercial banks in housing schemes is the part of a well thought out plan to uplift the economy by activating the construction industry which is allied to a variety of downstream industries at the grass root level.

Besides the support provided by the commercial banks, the budgetary allocations for Public Sector Development Program (PSDP) is yet another significant factor contributing to the growth of various industrial sectors producing construction material especially the cement industry.

The cement industry has started producing tremendous financial results which are reflected in their annual reports. Almost each unit of the cement industry has posted handsome profits at the end of the financial year and has also declared dividends for the share holders.

The local sales of cement in the domestic market is likely to register a substantial increase during the current financial and the total production of the commodity which was 11.4 million tons in the previous financial year is likely to increase to the level of 12.5-13 million tons during the current financial year 2003-04.Cement sales during the current fiscal year would register a growth of 9 per cent because of several housing projects are to commence following government's initiatives to provide cheaper loans to builders and general public.

The federal budget 2003-04 has provided several incentives to the cement sector in line with the policy to use it as a tool for overall economic growth of the country.Cement sector in fact has a strong industrial base in Pakistan with an installed production capacity of 18 million tons as against the requirement of around 12 million tons per year.

The cement sector was not an exception to the over economic recession, the country witnessed during last decade. Consequently, the entire cement industry was sinking due to lower demand and was running even below 50 per cent of the production capacity three years back.

However, the changing environment and political events and of course the right decision at the right time by the present government bailed the economy out of the deep crisis. With the start of the development activity within the country and the start of re-construction of Afghanistan helped increasing the demand for cement. According to an assessment, the demand for cement was jumped substantially which is reflected in the increase of production by 1.5 tons during last financial year.

Generally speaking, when the production of an industry grows on the economy of scale, its prices are naturally come down. However, it does not happen in Pakistan due to known characteristics of making maximum profit by the trading community. They always succeed in making profits mainly on two reasons. Poor mechanism for price control and secondly, the lack of consumer resistance is responsible for instability in prices of the consumer goods in Pakistan. The representative bodies in the private sector normally get published their voice of protest in the newspapers which usually fizzle out due to ineffective follow up.

The cement prices are one of the examples of such cases. In the federal budget 2003-04, the government had reduced the excise duty on cement at 25 per cent with reduction of Rs250 from Rs1000 per ton of cement. However, the price of cement either remained static to the previous level or even increased by Rs20-25 per bag. The builders and the construction industry representatives were of the view that the price of cement should have come down to the level of Rs170-180 according to rural or urban area location of the sales point. However, the cement industry especially in the private sector has formed a cartel obviously to maximize the profits. The manufacturers have their own grievances. They say that despite the considerable reduction in the interest rates or the financial charges of the banking system, the cement industry is paying the financial charges on the previous rates. The decision of reduction in mark up rates on bank lending should have implemented with retrospective effects. Another excuse for maintaining the current prices is that the cement industry has suffered huge losses in the past on account of costly oil prices and other factors due to persistent economic recession which hit the industry's economic viability and many units were closed down. Now they must be given time to overcome the adverse effects of the losses they suffered in the past.