CEMENT UNITS ON THE VERGE OF COLLAPSE

KANWAL SALEEM
(feedback@pgeconomist.com)

Mar 21 - 27, 2011

The cement industry in Pakistan has grown gradually with the passage of time. At the time of independence, there were only four units with total production capacity of nearly half a million tons per annum.

Four of the 22 cement manufacturers have closed down plants while three others have shut their wet process lines, trimming the country's cement output capacity by 7.7 per cent to 41.235 million tons a year from 44.680 million tons last fiscal year.

During the financial year ended 30th June 2010, the demand for cement witnessed growth of more than 11 percent despite continued uncertainty on economic, political and law and order fronts. As a consequence of unprecedented flooding caused by heavy monsoon during the 1st quarter of 2010-11, demand for cement has been adversely affected, however the devastation caused by the floods should result in additional demand for cement for the rehabilitation of infrastructure and housing.

In the year under review, the cement industry had low selling prices due to fierce competition, high interest rates, increasing power tariffs, and increase in duties, taxes, and royalty on raw materials.

On the export front, regional markets like the UAE are likely to remain depressed for the foreseeable future, while other markets like Afghanistan continue to generate good demand for Pakistani cement.

Experts believe that Pakistan cement industry may face tough time ahead as the exports are winding down on account of falling demand amid growing capacity expansion in the region. The cement industry has gone through a hard time over the past few months as after devastating floods the industry witnessed a decline in sales during the disruptions and tepid constructional activities across the country.

The overall production capacity of the cement sector increased substantially to 38.95 million tons at the end of 3QFY08 as compared to 30.1 million tons at the same time in FY07. In FY09, the production capacity further increased by 12.4 per cent to 41.67 million tons. The cement sector of Pakistan showed an impressive growth of 24.3 per cent in the cement dispatches during FY08. Total cement dispatches grew from 24.22 million tons in FY07 to 30.11 million tons in FY08. In FY09, the total dispatches grew only slightly by 1.61 per cent to 30.755 million tons. There was a 6.5 per cent growth in local cement dispatches, as demand for cement in the domestic market due to increased construction activity and government spending on infrastructure development. Local cement demand witnessed a decline of 13 percent YoY in FY09 at 19.4 million tons versus 22.4 million tons in FY08. As per data, northern cement market recorded a decline of 17 percent at 15.9 million tons, whereas the southern market posted a growth of four percent at 3.5 million tons during FY09.

The industry sources blamed the losses suffered by the cement producers on rising input costs for the plant closures. According to All Pakistan Cement Manufacturers Association (Apcma), the price of furnace oil has increased by over Rs1,000 a ton from last year, diesel by Rs5 a litre, coal by $35 a ton, electricity by Rs7.15 a unit and paper bag by Rs23 a piece. Several units were on the verge of imminent collapse due to the losses. The cement industry accrued losses to the tune of Rs10.23 billion during the last financial year. The industry has not been able to pass on the large impact of rapidly increasing input costs to consumers because of stiff competition in the market and the surplus capacity.

Currently, the retail cement prices range from Rs340 to Rs355 per bag in different areas of the country. The domestic cement sales have dropped by 8.5 per cent to 13.79 million tons in the first eight months (July-Feb) of the current fiscal from a year ago on the back of slow construction activity due to poor economic conditions and massive cuts in the public sector development programme.

Cement exports have also registered a decline of 14.8 per cent during this period. The government taxes, which form 30 per cent of the price of a 50kg bag, were the main reason for the plight of the cement sector. The taxes on cement are highest in the region, industry sources said.

According to them, the federal and provincial excise duties amount to Rs37 per bag in addition to 17 per cent (or Rs45 a bag) GST. Reduction in taxes is necessary to encourage cement consumption. The removal of excise duty would improve the viability of the industry.