Feb 16 - 22, 2009

World trade of cement is about 2.50 billion ton and its consumption is expected to increase to 3.13 billion ton by 2015. Therefore, several countries, including Pakistan, are expanding their production capacities in a big way. World's largest plant in Missouri, US, with a capacity of 12,000 ton of clinker per day or four million ton of cement annually, is to be commissioned in third quarter of 2009.

The Government is encouraging cement plants with the capacity of 10,000 ton per day, a green field project costs about $234 million. In the absence of proper guidance, big cement manufacturers are investing without planning, i.e., under present conditions investment is viable or not. Capacity expansion on large scale was undertaken on projections of high cement demand, especially in the export markets.


Cement production capacity was at 16.3 million ton in 2002-03, which doubled to 30.2 million ton and is expected to be at 44.8 million ton in 2008-09. The production would reach 47 million ton by 2010-11.

There are 29 cement units in the country. Acceleration in regional construction activities and other exogenous factors like war in Afghanistan has created unprecedented demand for rehabilitation during last 5 years.

Moreover, the 2007-08 budget allocated a record amount of Rs520 billion for the construction in health, education and infrastructure. During 2003-07 cement industry had registered an average growth rate of 20 percent. The industry estimated that cement export would reach 6.6 million ton in 2008 in the light of growing regional demand for construction.

Per capita consumption of cement is 131 kg p.a. as compared to world average of 273 kg. The manufacturers saw bright prospect of increased in domestic consumption in future and started expending their capacities.

But the actual position was quite different, as local demand remained unstable over the last five years. For instance, the demand growth was 24 percent in 2006-07, total dispatches were 21.05 million ton. The industry estimated an annual growth rate of 20 to 30 percent but in 2007-08 demand grew only 6.47 percent, which is projected to further decline in 2008-09.

The cement demand is directly linked with development of infrastructure and real estate activities. It is expected that the consumption would not pick up rapidly due to economic slowdown; drastic cut in the public sector development programme of Rs100 billion will curtail the construction activities further. Thus, the 2007-08 target of dispatching 31.2 million ton, cannot be met despite highest ever export.


The capacity utilization was 64 percent in 2000-01, which increased to 91.3 percent in 2004-05 and has been 81 percent in 2007-08. In spite of not achieving previous year's target, demand for 2008-09 was projected at 40.6 million ton that was also not realistic. During July-November 2008, there was a nominal growth of 3 percent and total dispatches were only 12.40 million ton, including 7.94 million ton local dispatches showing a negative growth of 16 percent.

Actually, capacity expansion was based on the rising regional demand. Exports increased from 1.51 million ton, 2005-06, to record 7.72 million ton in 2007-08. But export markets hit by recession; therefore, export target of 10 million ton for 2008-09 also became unachievable. It is evident from the fact that during July-December 2008 exports were only 4.733 million ton. India has recently cancelled import orders for 25,000 ton.

It was estimated that UAE would require about 26.2 million ton cement by 2011. But at present there is slump in construction industry and real estate business in the UAE, due to global recession, this would decrease cement export from Pakistan too.

India, the second largest cement producer, will not only meet its domestic demand but also planning to meet regional demand also. Recently, India has imposed 12 percent duty on import of cement to support its industry. India has added 30 million ton capacity during 2007-08 that increased the total annual installed capacity to 200 million ton.

Moreover, due to high fuel prices and increasing financial costs, besides declining freight charges that were eroding the edge Pakistan possessed due to geographical proximity, Pakistani cement may not be competitive in countries where it exports cement, such as Afghanistan, Sri Lanka, Nepal and African countries. During the last two years, Iran and Saudi Arabia have expanded their capacities and would be main suppliers of cement to the Middle East in future.

Therefore, it was necessary that before expansion local cement manufacturers should have to consider regional developments as well as analysing on local market conditions.


The cement prices rose to 65 percent in 5 months of FY09, average retail price reached Rs367 per 50 kg bag or Rs7, 340 per ton.

The majority of country's more than twenty cement producers buy imported South African, Indonesian and Chinese coal. Country's average imports of coal from South Africa are almost 3 million ton per annum. It is to be noted that international coal prices fall to $70 per ton from $140 per ton. The cement prices were fixed when coal prices were 50 percent higher than the current levels. In spite of this decrease the manufacturers have made a cartel and did not reduce the cement prices proportionately.

To break this cartel the Competition Commission of Pakistan was legally empowered to impose maximum fine of Rs50 million on each cement manufacturer or penalty equivalent to 15 percent of the turnover after proving cartelisation. If penalty of 15 percent of the turnover is imposed on only five big companies, they have to pay an amount of Rs2.4 billion. The 5 cement companies cumulatively have 59.3 percent of the total market share.


Cement exports increased 72 percent to 4.5 million ton during July-November 2008. This trend has changed the sales composition. The exports now comprise 36 percent of the total dispatches. This performance was attributed to depreciating rupee and global demand-supply gap.

However, later on exports started declining due to the global economic recession. The demand supply gap in the international market is expected to narrow down further as some countries gear up with more capacity, this would reduce export demand of Pakistani cement.

The downward slide in local demand is also expected as a result of tightening monetary policies, particularly after entry into the IMF SBA. Local demand declined by 16 percent in 5 months of FY09.

It seems that golden era for local cement exporters are coming to an end as cement importing countries are facing huge problems. The UAE, the biggest market for Pakistani cement imports over 40 percent from Pakistan, is also on the brink of an economic downturn. On the other side, exports to Sri Lanka and India are halted mainly due to prevailing regional tension among India and Pakistan that would block the Indian controlled sea, which connects Pakistan with Sri Lanka via India. Country exports around 11 percent of its overall cement to Indian market, which due to aforementioned reason has become static.


Presently, the cement industry of Pakistan is heavily burdened due to levy of Federal Excise Duty, which is Rs750 per ton and GST 15 percent on duty paid price. In addition to Federal Excise Duty and GST, cement industry is also paying the provincial levies, Royalties and Excise Duties, on acquiring of raw material for production of cement, i.e. lime stone and shall clay. A comparison of taxation with other regional countries revealed that taxation in Pakistan is highest.


To achieve the expansion targets, cement companies have taken huge loans from the local and foreign banks and the companies have to pay Rs26 billion to banks till 2012.

Increase in interest rates would hamper already sanctioned loans for the expansion plans of the industry.

Several commercial projects have come to a halt following the unfavorable economic and political conditions, and the hike in input prices. Local sales in the north zone, constituting more than 80 percent of the total local demand, have decline by 19 percent. The sliding demand in northern areas is also due to winter in the region and the worsening law and order situation curbing construction activity.

The surprising point is that after witnessing a sharp decline in profits during 2008, the cement sector posted profit after taxation of Rs1.3 billion as compared to Rs500 million in the corresponding period of a year earlier, reflecting a robust growth of 167 percent.

The growth in profit is attributed to higher local retention prices and rupee fell to a record low against dollar, resulted in the rupee based export sales enhanced. Companies with profits in both the quarters posted 55 percent earnings improvement. Although total dispatches were up just 3 percent but net sales grew 96 percent. Resultantly, gross profits depicted 332 percent growth and gross margins doubled to 30 percent, compared to first quarter FY08 of 14 percent.

The future outlook of cement industry depicted that the performance of the cement sector will remain depressed in FY09. The surplus capacity of cement is likely to create adverse effects on the industry. Therefore, on the one hand, it must strengthen existing export markets and on the other, explore new markets on priority basis.

The slower activity in construction sector will persist, unless the government undertakes implementation of mega water reservoir projects, like Diamer-Basha Dam. Otherwise, there may be gross under utilization of the total installed capacity that has recently been enhanced.

However, new export markets such as Russia and the European countries have already been identified. The UAE had placed an order in May this year for import of 100,000 ton of clinker from Pakistan for further processing it locally to make cement.

The cement producers have proposed to develop infrastructure facilities at Karachi and Bin Qasim ports by constructing cement silos on self financing basis. This would help in export of cement directly from bulk silos to the vessels, but the plan was not implemented.

In spite of depressing construction conditions, foreign direct investment is coming for creating additional cement production capacity. The FDI inflow in the cement sector during July-October 2008 amounted to $17.8 million, whereas investors from China and the UAE have shown interest in setting up new cement plants.