CEMENT SECTOR IN THE LIMELIGHT

According to one estimate by 2009, our cement companies may have to run on 65% capacity because demand is expected to reduce in our own country

By KHALIL AHMED
May 08 - May 14, 2006

There was a lot of speculation in the capital market say in 1970s and so is today. But one cannot relate speculation phenomenon only to capital market. Now, speculation is probably prevalent in all types of businesses. Well, it would not be wrong to say that speculation of high demand in cement has led the commodity prices to the heights which were not expected in near future. This speculation may be because of reconstruction of quake-hit areas, construction of dams, construction boom in the UAE, mega projects announced by China, ever-increasing demand by Afghanistan and growing demand within our own country for our own mega projects. It would not be just, if everything is related to speculation. It is also essential to see whether the increase in cement prices is by virtue of soaring input costs. We must analyze the issue of our production capacity over the years in relation to the home demand as well.

COST MECHANISM OF LOCALLY PRODUCED CEMENT
15TH APRIL, 2005

 

PER TON

PER BAG

Local Prices (Ex- factory)

4,600

230

Excise Duty

750

38

Sales Tax (15%)

803

40

Total Cost

6,153

308

Dealer Margins

800

40

Retailer Margin

200

10

Retail Price of local cement

7,153

358

Traditionally, our cement sector has done excellent job in the capital market but the recent news of unlimited import of cement from India, China, and from other countries have left somewhat impact on the performance of the cement sector in the capital market; particularly in the week before last. To be precise, because of import news, the complete cement sector remained in minus on April 28, 2006. This impact to me is very short-lived because last Wednesday when there were some news regarding the ban on export of cement in India again revived the cement sector in the capital market.

Since the news of import are rife and it is being thought that the prices will plummet, we need to wait and see that how much impact will import leave on prices paid by the consumers. Though, import news have already pushed the prices down by roughly say Rs 30 to Rs 50 per bag, yet I don't see that import is the best option. According to one estimate by 2009, our cement companies may have to run on 65% capacity because demand is expected to reduce in our own country. One thing which every consumer must have appreciated in the mean time is that it was really a good step to ban export of cement to Afghanistan for a month or so. At present, our cement production is around 22 million tons per annum and I don't think that our consumption is that high that we need to import the commodity from other countries. Since I have discussed our present production capacity, let me give you some figures of the recent past. The production of cement in 2001-2002 was around 9.9 million tons. It increased to 11 million tons in 2002-2003. In early 2004, it was known that per annum production of the commodity touched 17 million tons. At present, it is being estimated that per annum production is around 21 million tons and it is also being estimated that production will be around 40 million tons in next couple of years because of the prospects of at least five new production plants.

Now let's discuss per capita cement consumption in our country. Per capita consumption of cement in our country is one of the lowest in the region. I must tell you also that per capita steel consumption of steel in the western world is 400 kgs whereas in India it is 20 kgs and I have no data of my own country. Three years ago, per capita consumption of cement in our country was less than 70 kgs against that of India which was around 100 kgs. Today, per capita consumption of the commodity in our country is over 100 kgs even then it is the lowest if we compare it with Iran, India. China etc. It is also true that the demand of the commodity is growing by roughly 15% annually. The thing which I have failed to comprehend is that when our production is far ahead of the need, then why the present scenario of the import of the commodity has surfaced. We also know that we have potential to export up to 10 million tons of the commodity. According to one estimate, our cement export to Afghanistan can be around one million (legal) tons per annum which may rise to over four million tons. We also have the prospects of exporting cement to UAE, Iran, India, China etc. but in the mean time we are focusing on import of the commodity. When it comes to import of quality cement with less freight charges comparatively, I think India would be preferred to China. And it is widely thought that with the import of duty free cement, the commodity prices may be slashed by Rs.50 per bag.

COST MECHANISM OF IMPORTED CEMENT FROM INDIA 15TH APRIL, 2006

 

PER TON

PER BAG

Price (FOB) @

$65/ton

3,927 196

Excise Duty

750

38

Sales Tax (15%)

702

35

Before Subsidy

5,379

269

Subsidy

1,200

60

Total Cost

4,179

209

Dealer Margins

400

20

Retailer Margin

200

10

Retail Price of imported cement

4,779

239

Well, let's discuss the reasons for the price hike. When we look at the data, we would find that the cement prices have been augmented every year. And why shouldn't the prices be increased when the prices of other commodities have soared. Increase in oil prices is the root cause of price hike in the world. And hike in oil prices will put the American economy in recession which will leave an impact on the world. In 2002, per barrel oil prices were $ 20 and by mid of 2004, the prices soared to $50. Recently the prices of oil crossed $74 per barrel which is a very grim situation. Cost push inflation should be considered the worst scenario. When there are rising costs of inputs, there is every reason to increase the prices and this had been observed in the prices of cement. Electricity prices have shot up. Coal prices are high. Diesel prices have surged. Transportation cost has increased. The landed coal prices increased by 14.6 percent per ton in March last year. Gas tariff was increased by over 8% in February last year. The transportation cost is up because of soaring oil prices. Though many cement makers have shifted to coal-firing system, a cheaper energy source, yet the rising input costs are a major problem. Apart from the above reason, two other reasons for the price hike could be the upcoming colossal demand for the reconstruction work in the quake-hit areas and the construction of the dams in our country. The inauguration ceremony for the construction of Diamer-Bhasha dam has taken place and Kalabagh, Akori, Munda and Kuran Tangi are the next projects. When you look at the cement prices you would find a constant rise over the period of time. Prices of cement were as low as Rs160 in December 2002 .In 2003, cement prices ranged between Rs200 and Rs225 per bag depending on the brand. In 2005, cement prices ranged between Rs270 and Rs280 a bag. Last month, the ex-factory cement prices ranged between Rs340 and Rs360 per bag whereas the retail prices had gone as high as Rs400 a bag. It was only after the ban on export that the prices fell by Rs 30 on average. It is being thought that incase government reduces excise duty, the prices will keeping hurting the consumers. It is to know that the sales tax in India is 12.5 percent whereas in our country, it is 15 percent.

The increase in cement prices has affected the construction activities for the time being. One construction contractor named Ghulam Hussain with 30 years of experience in the realm says that he has never seen in his life time prices rising as it has happened over last four to five years. According to him 30 years ago, per bag price of cement was between Rs 06 and Rs 07. Ten years ago the prices were between Rs 95 and Rs 120 and about three years ago, prices were between Rs160 and Rs 200. But recent unprecedented rise has affected the business drastically and the people are waiting for the prices to plummet.

I would conclude by writing that the construction industry's blame that the manufacturers have reduced cement production to create an artificial shortage to get higher prices does not sound right to me.

PRICE INCREASE BY CEMENT MANUFACTURERS 22ND MARCH, 2006
Rs per bag

COMPANY

REVISED PRICE

OLD PRICE

CHG. (RS)

CHG. (%)

DGKC

300.0

2 75.0

25.0

9.1%

LUCK

285.0

2 65.0

20.0

7.5%

PIOC

285.0

2 65.0

20.0

7.5%

FCCL

285.0

2 60.0

25.0

9.6%

MLCF

290.0

2 60.0

30.0

11.5%

CHCC

275.0

2 55.0

20.0

7.8%

AACIL

275.0

2 55.0

20.0

7.8%

JVDC

270.0

2 50.0

20.0

8.0%

DCL

290.0

2 60.0

30.0

11.5%

FECTO

285.0

2 65.0

20.0

7.5%