26152245 cement industry pakistan a strategic analysis

8/10/2019 26152245 Cement Industry Pakistan a Strategic Analysis

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ABSTRACT

The paper focused on cement industry of Pakistan. It answered questions like industry

attractiveness, competitive forces, SWOT analysis, industry environment and other industry traitsor features. The project discussed history, current scenario and future rowth of the industry. The

role of overnment and certain issues like per capita consumption of cement in Pakistan, sector

profita!ility, rowth chances, Oliopolistic competition amon cement firms, are discussed. The

productive capacity, dependence on suppliers, and forein investment in cement sector is also

discussed.


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TABLE OF CONTENTS

CHAPTER 1 CEMENT INDUSTRY PAKISTAN

1.1 HISTORY 1

1.2 CEMENT SECTOR IN NINETIES 2

1.3 CEMENT SECTOR ROLE IN ECONOMY 3

1.4 PAKISTAN: STRATEGIC LOCATION 4

1.5 CEMENT SECTOR: CURRENT SCENARIO 5

1.5.1 AN OVERVIEW 5

1.5.2 CURRENT PROBLEMS 6

CHAPTER 2 INDUSTRY ANALYSIS

2.1 INDUSTRY SWOT ANALYSIS

2.2 THE MA!OR PLAYERS "

2.3 THE BASIC FEATURES OF CEMENT INDUSTRY PAKISTAN 11

2.4 CEMENT INDUSTRY PAKISTAN ENVIRONMENT 16

2.5 MAIN CONSUMER #BUYER$ OF CEMENT SECTOR 16

2.6 FORCES TO CHANGE INDUSTRY 1%

2.6.1 GOVERNMENT PRESSURE 1%

2.6.2 PRICES OF COAL 1%

2.6.3TA&ES ON CEMENT 1%


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2.6.4 CONCRETE ROADS 1%

2.% TYPES OF CEMENT 1

2.%.1 WET PROCESS 1

2.%.2SEMI'WET PROCESS 1

2.%.3 DRY PROCESS 12. MA!OR TECHNOLOGY SHIFT 1

CHAPTER 3 FDI( COMPETIVE EDGE AN D 5 FORECES ANALYSIS

3.1 KEY FACTORS FOR COMPETITIVE EDGE 2)

3.2 FOREIGN INVESTMENT 2)

3.3 PRICE MONOPOLY 21

3.4 MICHEAL PORTER*S 5 FORCES 22

3.4.1 NEW ENTRANTS 22

3.4.2 BUYERS 22

3.4.3 SUPPLIERS 22

3.4.4 SUBSTITUTES 23

CHAPTER 4 FUTURE( GROWTH POTENTIAL AND INDUSTRY ATTRACTIVENESS

4.1 CEMENT SECTOR FUTURE FORECAST 24

4.2 THE LONG'TERM DOMESTIC GROWTH SCENARIO 24

4.3 SUPPLY SIDE OF THE PICTURE 25

4.4 PAKISTAN ENTRY INTO WORLD CEMENT MARKET 26

4.5 FUTURE 2%

4.6 IMPACT ON BUDGET

4.% SOME RECOMMENDATIONS 2"

4.%.1 GOVERNMENT PRESSURE 2"

4.%.2E&CISE DUTY 2"

4.%.3 EARNING FORE& 3)

4.%.4SEEK DEMAND+SUPPLY FORCES 3)REFERENCES


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1 CEMENT INDUSTRY PAKISTAN

1.1 HISTORY

"t the time of independence in #$%&, only one or two units were producin rey cement in the

country. 'urin the decade of #$%()*(, the num!er of cement units increased to si+. 'urin the

"yu! era the economy started to row and the construction activities underwent a !oom. To meet

the rowin demand of cement new units were set up. 'urin the decade of #$*()(, the num!er

of cement units increased from to $. 'urin the followin period of -ulfiqar "li hutto all the

industrial units, includin cement industry, were nationali/ed, therefore, no new unit was set up

durin #$)&&. 'urin the period of 0eneral -ia)ul)1aq, #$&&)((, denationali/ation of

industrial units !oosted the investments. 1ousin and construction industries picked up and the

demand for cement increased. Thus, the num!er of cement units increased from $ to 23 and

finally 2%.

Pakistan4s cement sector has come a lon way. "t Partition, in #$%&, Pakistan had only five

cement plants 5one of which was in 6ast Pakistan7 havin a total annual capacity of *8,888

tons. 'emand at that time was estimated at over a million tons. In the *84s five new cement

plants were set up with a total capacity of 3.3m tons. 9our more plants : ;aple


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annual rated capacity of 2.(m tons. Indeed, the "yu! era was a ood time for cement > there

was rowin demand and new cement plants were set up to meet this demand. Then the first

!low to the industry came. ?nder the 6conomic @eforms Order of #$&2 all private sector cement

plants were nationali/ed and mered with state owned plants to form the State Aement

Aorporation of Pakistan 5SAAP7. This heralded the start of the BState Aement 6ra4 5#$&2)$27.

Total production just !efore nationali/ation had touched 3.*m tons. y the end of this era in

#$$2, it had increased to just (.%m tons. y #$&&, Pakistan, a country rich in all the raw materials

required for cement, had to start importin. This would continue until #$$*.

etween #$&&and ((, overnment policy shifted towards denationali/ation and emphasis on

housin and construction. To meet the demand, in the (8s, seven units with a total capacity of

2.*%m tons were allowed !y the overnment to !e set up in the private sector and four plants

were set up !y the SAAP in the pu!lic sector. The private sector plants were Aherat 5#$(*7,

Pakland 5#$(*7, "ttock 5#$(7, 'hadahoy 5#$((7, 6ssa 5#$((7, "nwar/e! White Aement

5#$((7 and 96ATO 5#$($7. The pu!lic sector plants were Thatta 5#$(37, 'andot 5#$(37, Cohat

5#$(37 and '.0. Chan 5#$(*7. y the end of this period, there were a total of 2% cement plants in

the country. ut it was not an easy time for private sector plants. Their prices had to compete

with prices fi+ed !y the SAAP, which were on the lower side. In #$$2, the State Aement 6ra

came to an end with the privati/ations of eiht cement plantsD ;aple


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1.2 CEMENT SECTOR IN NINETIES

'urin the early nineties there was an acute shortae of cement in the country, particularly in the

north. 'emand could not keep pace with supply and Pakistan was forced to continue importin

cement. Importin cement is an e+pensive affair. Since it is a heavy commodity, freiht and

transport chares are often e+or!itant. 'ue to the shortae coupled with hih cost of imports,

cement prices in the early $8s were hih. ut demand for cement was rowin rapidly 5at an

averae of (E a year7. The economy also looked as if it was headin towards a hih rowth

phase. There was some forein investment comin in, sinificant infrastructure development

projects were predicted, many Independent Power Producers were croppin up and the

population continued to row una!ated. The 0'P rowth rate was estimated at .*E and

population rowth at 3.2E. Therefore, it looked as thouh there would !e an ever)increasin

demand for cement. ecause it was felt that the economy would row sinificantly and there

would !e a hih demand for cement, many of the e+istin plants > Aherat, '.0 Chan, ;aple


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million tons which will place the country in a respecta!le position with reard to its cement

consumption per capita.

1owever, it is imperative that the !uoyant rowth in domestic consumption !y !oth the pu!lic

and private sectors, re!uildin efforts in "fhanistan and e+port of cement via the sea route

coincide, so as to a!sor! the enhanced production which will !ecome availa!le in !oth the Forth

and South -ones. "ll indications are that the rate of 0'P will !e accelerated even further in the

comin years which auur well for the industry. 1owever, should for any un)foreseen reasons

demand rowth falters, there could !e a sharp reduction in capacity utili/ation which must !e

avoided at all costs.

The cement industry was amonst the few !riht spots in


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capacity of #%.$ million tons, representin &&E of the industry, have already converted to coal.

@emainin units are in various staes of conversion. In addition to this, $ units are optimi/inH

e+pandin their e+istin production facilities due to increase in cement demand from local

markets and from markets in "fhanistan and ;iddle 6ast countries.

'ue to non)availa!ility of ood quality indienous coal, the industry has no option !ut to import

low sulphur coal from countries like Indonesia, Ahina and South "frica. The risin prices of

imported coal has su!stantially reduced the estimated savin envisaed !y the cement

manufacturers, on the !asis of which the conversion process was implemented and investment of

millions of dollars was made !y them. The prices of imported coal have shown sinificant rise

since =uneH=uly, 2883. " #88E increase in imported coal prices durin last two years has

narrowed down the difference in cost of production !y coal vs. furnace oil !y around **E.


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cement to its neih!orin countries.

T,-/ 1: SWOT A0,

2.2 THE MA!OR PLAYERS

@ "l "!!as Aement

@ "ttock Aement

@ estway Aement

@ Aherat Aement

@ 'hadahoy Aement

@ 'andot Aement

@ ' 0 Chan Aement

@ 'ewan Aement

@ 9auji Aement


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@ 0hari!wal Aement

@ =avedan Aement

@ Cohat Aement

@


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Pioneer Aement 38,888 3.3$E

Saadi Aement *&,888 3.8*E

-aman Aement 38,888 3.3$E

"ttock Aement &*,888 %.8&E'hadahoy Aement *38,888 2.(*E

6ssa Aement %&2,*88 2.*%E

=avedan Aement 38,888 3.3$E

Pakland Aement &(&,*88 %.2%E

Pakistan Sla Aement #*&,*88 8.(*E

Thatta Aement 3#*,888 #.&8E

-eal Pak Aement 38,888 #.$%E

T,-/ 2: C,, M,78/ 9,7/

*The market leaders in terms of market share are highlighted.

2.3 THE BASIC FEATURES OF CEMENT INDUSTRY PAKISTAN

@ No Economies of Scale (In Pakistan)

@ Oligopolistic competition among firms

@ Attractive Mergers & Acquisitions

@ Strong demand and suppl forces

@ !eak or no Su"stitutes for cement

@ #enture capitalist firms

@ $ess entr "arriers

@ Industr in "oom


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@ %ig gro't cances

@ $ittle product differentiation

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NAME Aap ?praded

Aapacity

Total Aapacity

NORT

H

Aherat

Aement

8.&

*

(888 8.2

%

8.$$


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white

Cohat

Aement

8.*

%

5#+3,(887 #.#

%

#.(

Cohat

White

Aement 5#+*887 8.#

*

8.#*

SOUTH

"ttock

Aement

8.&

2

5#+3,8887 8.$ #.2

'hada

hoy

Aement

8.*

8%

#,888 8.3 8.(8%

0ala

'ari

Aement

5#+2,(887 8.(

%

8.(%

Pak


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and customers. The total market capitali/ation of all the cement firms in Pakistan equals $2E.

The per capita consumption is lowest in Pakistan as compared to other countries.

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The undue pressure of the overnment to keep the prices lower than the prices of other countries

will prove to !e counter productive for the economy. " price level of @s. 28 per !a seems to !e

a via!le price for the industry althouh it will still !e lower than the cement prices prevailin in

other countries.

2.6.2 PRICES OF COAL

"nother factor which has affected the profita!ility of cement sector is a sure in prices of

imported coal. The AN9 price of coal which used to !e around ?S %8 per a few years !ack has

now one up !y #88E to over ?S (8 per ton. 9uel cost constitutin around 38E of cost of

manufacturin cement has heavily impacted the cost of production of cement.

2.6.3TA&ES ON CEMENT

Aement is an item of !asic necessity which is predominantly required for housin and

infrastructure. This is the reason that in most of the countries ta+ation on cement is either /ero or

nelii!le. In Pakistan however, ta+es on cement are the hihest.

2.6.4 CONCRETE ROADS

9@ succeeded in enhancin the level of revenue for the overnment, it can consider radually

switchin over to concrete roads. Aapital cost of concrete roads is hiher, !ut maintenance cost is

almost /ero. 9urther, as per study conducted in India there is a #2 per cent savin in fuel

consumption on plyin vehicles on concrete roads. Su!stantial savins can !e achieved !y this

switchover

2.% TYPES OF CEMENT


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The industry is producin ordinary Portland cement, Sla Aement, Super Sulphate @esistin

Aement, Sulphate @esistant Aement and White Aement. There are three conventional processes

used in Pakistan to manufacture cementD

2.%.1 WET PROCESS

In view of the constraints of kiln dimension and lare water requirements and e+tremely poor

heat efficiency, wet process has !ecome o!solete.

2.%.2SEMI'WET PROCESS

The process is suited for materials with sufficiently hih plasticity. This process has also !ecome

outdated due to hih fuelHenery consumption.

2.%.3 DRY PROCESS

The dry process was formerly used where water and the raw materials were scarce. ut now it is

the most popular process in the cement industry. The advantaes areD 5#7 the fuel requirement is

a!out (88 Ccal per k of clinker 5which is a!out %8 percent less as compared to the wet process7.

This process ena!les the processin of a water rane of raw and the maintenance is easier. The

raw material is preheated and partially calcined resultin in hiher kiln efficiency. The kiln !ein

shorter in lenth requires less space in erection and easier to maintain.

2. MA!OR TECHNOLOGY SHIFT

?ntil #$&8, cement plants were installed on wet process or semi)dry technoloy while the plants

installed after #$(8s are !ased on dry process. The dry process is at least *8 per cent more enery

efficient than the wet process. Presently, (* per cent of the installed capacity is !ased on the dry

process. The Aement industry has !enefited a lot !y shiftin towards dry process, installation of

electrostatic precipitators and pre)heaters, automation of processes and installation of online

analy/er, which has resulted in environmentally !etter and enery)efficient industries. The


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@


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chief reasons !ehind this increasin forein investment.

"ccordin to SP statistics, forein investment in cement sector ot a raise of 3.& million

durin =uly)"uust this year, as compared to same period of last year. The e+ternal demand for

cement from 0ulf countries is rowin. This has attracted forein investors in the cement sector.

3.3 PRICE MONOPOLY

Aement prices in Pakistan have dou!led than that of the product in India followin the recent

price hike of the commodity on this side of the !order. Indian cement manufacturers are

reportedly marketin their product at @s#%* to @s#*8 per !aG which is almost *8 per cent less

than those in Pakistan, even after inculcatin the Bcurrency e+chane factor4.

The ;onopoly Aontrol "uthority has taken serious notices of cartels in the cement industry

5hikes in cement prices7, and decided to take action aainst the producers to protect the interests

of consumers. Price Increase !y estway Aement is (.2 per cent from @s2%* per !a o @s2*

per !a. ' 0 Chan Aement Aompany has increased cement price !y &.( per cent from @s2** per

!a to @s2&* per !a. Aompared to them ;aple


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The main consumer of cement industry is the housin sector, consumin a!out si+ty percent of

the total cement production. The housin sector is now !oomin as a part of the remittances is

!ein used for construction of houses, which has helped in increasin cement demand in the

country. Aommercial !anks, which are currently loaded with liquidity, are findin housin sector

to !e a potential area for lendin, after successful e+periment in their Aar 9inancin Schemes.


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psum plaster is a good su"stitute for cement*The planned manufacture of ypsum plaster,

aro)ypsum and plaster of Paris will !e a reat achievement in the sense that it will keep

cement prices in check. 0ypsum plaster is a ood su!stitute for cement for construction

purposes. 0ypsum plaster is also useful in !uildin construction in reions of e+treme cold and

hot climate. Pakistan has *) !illion tons of ypsum deposits. "ccordin to initial estimates, the

first plant for manufacturin ypsum products will !e esta!lished with an investment of around

@s. 2. !illion.

4 FUTURE( GROWTH POTENTIAL AND INDUSTRY ATTRACTIVENESS

4.1 CEMENT SECTOR FUTURE FORECAST

"fter a proloned recession, the Pakistani economy is rowin rapidly.


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for the housin sector will serve as catalysts for hiher rowth. ;oreover, e+port to "fhanistan,

currently rowin at 3$E, is a relatively new and important source of revenue for the industry.

The stron demand for cement has clearly affected the !ottom line of all cement companies and

encouraed the major players to e+pand to meet future demand. ut what is a sustaina!le lon)

term rowth rate "nd what is the demand)supply scenario oin to look like in the future

4.2 THE LONG'TERM DOMESTIC GROWTH SCENARIO

The correlation !etween 0'P rowth and demand for cement in Pakistan is weak. This has

pro!a!ly more to do with the quality of data than the actual relationship. 1owever, e+perience

from the 9ar 6ast, suests that cement consumption tends to row at #.* to 2.* times that of

0'P. ased on the upper limit of this empirical evidence, and the e+pected 0'P rowth rate of

&E, one could speculate that demand for cement should row at close to #&.*E per annum. If

one !elieves that this is a sustaina!le rowth rate, the picture for the ne+t seven years is likeD

F; ;7?@9 7,/

ut there is a caveat to this story. 9irst, while overnment may have aressive development

plans for the future, it may !e constrained in its spendin if there is an economic shock, such as


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another oil price hike. Second, land prices have dou!led, if not tripled, over the last two years,

and this will have a sinificant impact on the purchasin power of the individual consumer :

thouh it is unlikely to affect hih rise !uildin projects to the same e+tent. Third, risin interest

rates and continuin inflationary pressure may impact 0'P rowth and constrain the !orrowin

limit of consumers.


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e+tent of the over)supply will depend on rowth in demand, !ut if all the assumptions stated

previously are correct, the year 288)8& is oin to !e the start of another down cycle for cement

sector profita!ility. The pro!lem is not so much an over)estimation of the rowth rate !ut a moral

ha/ard created !y the cartel arranement.

In a !oom period, companies that e+pand capture all the additional value from an e+pandin

market, whereas in a !ust scenario they limit their loss !y spreadin it amonst all mem!ers

throuh the cartel mechanism !y way of anacross-the-board production cut in proportion to

capacities. In this way, they capture the upside ain, !ut mitiate their downside risk.

4.4 PAKISTAN ENTRY INTO WORLD CEMENT MARKET

"fter remainin a traditional supplier of cement to "fhanistan for the last so many years,

Pakistan has now entered the world market.

Shortae of cement in India and stron demand from Forth "frican countries, includin Jemen,

has compelled three major players in cement to further e+pand their production capacities within

a short period of one year.

estway is further e+pandin its capacity !y %,888 tons per day, and the plant would come into

production ne+t year.

Similarly,


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In the meantime, Pakistani e+porters were e+portin cement to Iraq !ut due to acute port

conestion, it remained irreular thouh there was reat demand for cement after the war for

reconstruction work.

1owever, cement units in northern areas of the country continued to feed the traditional "fhan

market !y supplyin up to 2.* million tons.

Similarly, stron demand for cement from Forth "frican countries, includin Sudan, 6thiopia,

"leria and some other states, made its way throuh the @ed Sea port of 'ji!outi.

On averae, cement e+ports to "frican countries fetch !etween ##8 and ##* per ton AN9.

4.5 FUTURE

If the current pace of development continues and mea projects !ecome reality, then it is very

likely that a lot of the cement will !e utili/ed and it is unlikely that the surplus will enter daner

levels. The rowth in demand to 28E durin 288% was most pro!a!ly a one time !oost for the

industry and the result of pent up demand from previous years and a hiher economic rowth

rate that spurred construction activity in the country. 9or 288, it is predicted that demand will

row at #3E and ease off after 288& to #8E. This rate is more sustaina!le iven that 0'P in

Pakistan is e+pected to row at over (E and, theoretically, cement demand usually rows at a

factor of #.* of 0'P rowth.

;any cement manufacturers have said that the situation is very different from the nineties due to

the different and more sta!le political structure. ut Pakistani politics is not sta!le. What if the

current political structure does not last What if, 0od for!id, somethin happens to ;usharraf

Then what Will all this development continue Several industry insiders are concerned that the

cement industry4s recent rowth has !een far too dependent on the person of Perve/ ;usharraf.


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There are worries that if another overnment comes to power, particularly a purely political

overnment, the industry4s fortunes will once aain a!ruptly plune !ack into the doldrums like

it did in the nineties. Optimistic as ever, ;ansha disareesD QI think the world has chaned >

this is not the same world it was #8 years ao. If you look at all the lo!ali/ation, you will see

that the proress towards development is irreversi!le now, whoever comes to powerR

It is hard to say what the future will hold for the cement sector. 'ependent as it is on increasin

construction and development projects, it4s fate, whether it likes it or not, is tied up with the

sta!ility of the country. 'ams, roads, ports and other developments are dependent on the policies

of the overnment. Past overnments have not attached importance to this so it is not a foreone

conclusion that any and every overnment will undertake massive pu!lic sector development.

"lso, the new sure in forein investment is a recent phenomenon and is also related to the

policies of the present overnment. On the positive side, however, there is always "fhanistan.

Once donor money starts comin in, the demand for cement in "fhanistan will rise, and as

cement is a !asic commodity in reconstruction, the !ulk of it 5if not all7 will have to !e shipped

from Pakistan reardless of which overnment is in power.

4.6 IMPACT ON BUDGET

The !udet will have a positive impact on the sector due to larer allocation to PS'P and

overnment4s focus on !uildin infrastructure 5road network and small dams7. 1owever, cement

demand from PS'P is directly linked to actual overnment spendin on mea projects where the

work on mea projects remains slow and the overnment however has not made any

announcement reardin the construction of any mea dam project. The @eduction in import

duty on imported spare parts from 2* per cent to five per cent shall improve cement marins


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REFERENCES

QGovernment May Ban Cement Exort! "f #ri$es Not C%t& Stakeholders Meeting TodayR, Fov

288&, usiness @ecorder.

9arid 9a/al, QRevie' of #akistan Cement "nd%stryR.

QCement "nd%stry Toying (ith Cons%mersR, 288%, '"WF.

QFa%)i Cement Comany imitedR, 288&, usiness @ecorder.

QCement Se$tor& is Targeted Exansion +ia,leR, 288%, '"WF.

QCement Se$tor -%tlookR, 288, '"WF.

QConsolidation -f Cement "nd%stryR, 288*, '"WF.

QCement isat$hes Cross /./0m MT in Mar$hR, 288& , 'aily times.


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QCement Man%fa$t%rers ink #ri$e "ss%e (ith CER, 288*, 'aily times.

QCement "nd%stry& #a$king Material Shortage to 1ffe$t Exort to "ndiaR, 288&, 'aily Times.

Ismat Sa!ir, QCement "nd%stry& "n Fo$%sR, 288*.

QCement makers agree to sto exort till 1ril 23R, 288, Pak tri!une.

QCement& G 451N CEMENT C-M#1N6 "M"TE) Finan$ial Statements 1nalysis 7%ne

/33/ to e$em,er /338R, 288&, Pak Tri!une.

Q5igh Gro'th in Cement "nd%stryR, 288, The Fation.

26152245 cement industry pakistan a strategic analysis

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