CEMENT INDUSTRY

 

Striving for a robust growth


By AMANULLAH BASHAR
Nov 24 - Dec 07, 2003

Once a sinking concern, the cement sector in Pakistan has started producing handsome financial results reflecting in the performance of the first quarter of the current financial year which are estimated five times more as compared to the earnings of this sector during the corresponding period last financial year.The net profit, after paying taxes, was estimated at Rs1,085 million in the first quarter of the 2003-04 which is more than five times the net earnings of the cement sector last year.

The factors behind this robust growth in cement sector which was running much below its capacity just three years ago are of course the government policies to shift this energy consuming industry from oil to coalfired system which led to reduction in the cost of production by 5 percent from Rs1,986 per ton to Rs1,882 per ton. However, a senior cement player was of the view that the cost of production as a result shift from oil to coal was not less than 27 per cent. However, according to calculation, the gross profit per ton increased from Rs448 to Rs753 per ton. The financial charges were declined by 35 percent from Rs516 to Rs337 million in the first quarter of 2003-04. Despite all these benefits enjoyed by the cement sector, it is not being passed on to the end users so far.

The handsome growth in this sector has started attracting investment and more units are likely to come in near future.Another factor which put this industry from losses to profit was the sharp decline in financial charges which the industry had to pay earlier. The drop in financial charges were the result of restructuring of the costly commercial debts, 25 percent reduction in central excise duty besides increasing demand of the cement both at local front as well as on the export side specially in Afghanistan. The demand for cement in the country was increased after the government policy to use the construction industry as the lever for promotion of economic activity in the country. In the last budget, the government employees were given the incentives of house building loans at a cheaper rate, while the commercial banks have come out in a big way to offer house financing at an affordable interest rate in Pakistan. All these factors contributed significantly to the growth of this sector. Financial experts are of the view that the actual results of the involvement of commercial banks in the construction loans at a massive scale will come out after 8-12 months.

Currently, 21 cement company are listed with the stock exchange of which 16 have shown positive improvement in their financial performances out of the remaining five, two units namely Chakwal and Mustehkam were non-operational these days while the Pioneer and ZealPak have secured permission for delay of the release of account and holding of AGM, Saudi Cement was still going through the trial runs.

The cement sector, during last financial year 2002-03, had some internal rift among different units disbanding the socalled cement cartel and a price war among within the sector had resulted in pre-tax losses to the tune of Rs191 million to this sector.

The price war, however, came to an end after better understanding among the companies leading net retention increase of eight percent from Rs2,434 per ton in the first quarter of 2003 to Rs2,635 per ton in the first quarter of 2004 were the factors behind growth in profits.

According to sales figures released by the All Pakistan Cement Manufacturers Association, the volume of local sales rose by 11 percent to 295 million tons during the first quarter of the current financial year as against 266 million during last financial year in the same period.

According to a market analyst, the cement sector performed reasonably better than the previous year. The unit wise break down of the performance showed that Attock Cement managed to gain 14 percent increase in profit after tax to Rs56 million, D.G. Khan Cement posted 215 percent growth in net income to Rs246 million from Rs78 million in the previous period, and Maple Leaf Cement earned after tax profit worth Rs202 million as compared to net income of Rs29 million last year.

The turnaround in the cement sector naturally fascinating the investors who had begun to lap up the cement stocks, which saw the market capitalization of the sector to surge to a record level of Rs48 billion on September 15, from Rs20 billion at the start of the current year.

OUTLOOK

The increasing demand for cement had encouraged capacity utilization of this sector. As a policy matter, the government is providing a strong back up to the construction industry to generate economic activity to overcome the formidable increase in the unemployment situation. Keeping in view that over 40 industries are directly allied to the construction sector, the State Bank of Pakistan has allowed house financing to the commercial banks at a massive scale. The economic managers will however have to sort out some of the fundamental problems like availability of adequate drinking water, supply of electricity at an affordable price and improved coordination among various development agencies to gear up the activities in the construction sector which has the potential to give a real boost to the economy.