Sector OVERVIEW:Pakistans cement industry has shown tremendous progress since Independence. In 1947, there were only four operational cement units in West Pakistan with the total production capacity of approximately half a million tons per annum. Demand during the same period was estimated at over a million tons. The industry experienced gradual growth as five plants were set up in the 1950s with a total capacity of 2.8 million tons with four more set up in the 1960s. These were the Ayub years when the construction industry went through a boom as demand grew because of an expanding economy and by 1969 the cement industry of Pakistan had 14 operational cement plants with an annual rated capacity of 3.3 million tons. Following this expansionary phase of the cement industry, the Economic Reforms Order of 1972 brought about nationalization of the private sector plants and resulted in a relatively stunted growth of the industry in the subsequent years. Nationalization merged state owned plants to form the State Cement Corporation of Pakistan (SCCP) and this State Cement era lasted from 1972 to 1992. During these three decades, production increased from 3.5 million tons to a mere 8.4 million tons by 1992 and Pakistans cement requirements were largely being met through exports which had started in 1977 and continued till 1995. Government policy moved towards denationalization in 1977-1988 and emphasis was placed on housing and construction. To meet demand in the 1980s, the government allowed 7 more units to be set up by the private sector housing a total capacity of 2.54 million tons and 4 plants were set up by the SCCP in the public sector. By the end of this period 24 cement plants operated in Pakistan. However, there were enormous price differentials between private and public sector as the SCCP fixed cement prices on the lower side for the public sector companies.

Through to 1995, local capacity was unable to fulfill local demand particularly in the north and Pakistan continued to import cement in huge quantities to satisfy need and some plants closed down in between. Prices in the 1990s were, therefore, high as a result of import costs and shortage of local cement. With projections for accelerated growth in demand in the world and local economy, five more plants were set up to gratify cement requirements locally. However, the local demand did not grow as expected during 1995 to 2000 and the cement sector experienced poor growth rates of 8% per annum. Therefore in post-industry expansion of the nineties, cement manufacturers had to go through a problematic period of capacity utilization. Pakistan began exporting in the years 2001-2002 to utilize excess capacity. Reduced deficits and focus on infrastructure building (by attracting foreign investors during the Musharraf years) pumped cement demand growth to approximately 20% in the mid-2000s. Existing players increased capacity foreseeing further boom in economy in these middle years with total production capacity resting at 44.7 million tons of cement as of the fiscal year 2009-2010.

CEMENT INDUSTRY OF PAKISTAN:

GrowthCement is one of the most important industries of Pakistan. Limestone and gypsum are the main raw materials for manufacturing of cement and they are present in abundance in Pakistan along with ample supply of Natural gas. This great potential makes the country capable of producing cement not only for local use but also for export as well. Pakistan has been exporting cement to the neighbouring countries like U.A.E, Afghanistan, India, Iraq and Russia.

There are 29 cement production units in the country. Upto May 2010, the total installed cement production capacity is 44.715 million tonnes. By the end of June 2011, the installed cement production capacity is expected to touch the level of 49.579 million tonnes.

Due to political instability and lack of availability of funds for public sector development program, cement industry of Pakistan was in the recession phase and registered an average growth rate of 2.96% for the period from 1990 to 2002. For the period from 2003 to 2007 cement industry of Pakistan had registered an average growth rate of 20%. Another 20-25 % growth is expected till the end of the current year. The boost in cement sector is because of the rising construction activity in the country, reconstruction activity in Afghanistan and increasing development expenditure by the government.

The cement demand grew 19 percent and 13 percent during FY05 and FY06 respectively. During the first nine months of FY07-08, production increased by 30 percent as compared to last year. The demand for cement was forecasted to grow by 26 percent during FY07 and 17 percent in FY08. The per capita consumption of cement has risen from 117 kg in FY06 to 131 kg in FY07. This rising trend continued in the FY08 to FY10 and it is expected to take the same trend in FY11.

Pakistan is rich in cement raw material. Currently many cement plants are operating in private sector. The last few years have been a golden period for cement manufacturers, when the government increased spending on infrastructure development. High commercial activity and rising demand for housing on account of higher per capita income has made cement sector to take off growth in double digits.

Pakistan cement industry has a huge potential for export of cement to neighboring countries like India, U.A.E, Afghanistan, Iraq and Russian states. There has been a robust growth of cement demand seen both in domestic and exports market during the fiscal year ended June 30, 2009-10. The industry achieved an overall growth of 32% with domestic demand of cement increased by 24.95% where as exports increased by 111.86%. The overall growth achieved by cement factories for the year under review was 111.29% consisting of domestic and exports markets at 71.02% and 335.12% respectively.

Pakistan cement industry has been successful to capture export markets of various GCC and African countries, which are new markets for the country other then conventional export market of Afghanistan and Iraq.

The main factors behind increase in demand of cement were: 60 percent higher Public Sector Development Projects (PSDP) allocation, seven percent GDP growth, increasing number of real estate development projects for commercial and residential use, developing export market and expected construction of mega dams.

As cement capacity is increasing to cater the rising domestic and regional demand, it started facing a tougher time because of price fall after the first quarter of FY06 due to increase in supply, energy prices started surging and higher expansion led to mounting finance and depreciation costs. After reaching Rs 430 per bag at the retail level earlier last year, cement prices fell sharply during 2007. Average cement prices were Rs 220 per bag as on April 27, 2008, as compared to Rs 315 per bag in 2006.

However, the cost and exports may be affected due to weakness of the US dollar causing coal, electricity charges and freight prices, comprising 65 to 70 percent of the cost. The PSDP allocation has been cut by Rs 75 billion and feared further cuts would curtail cement demand. Major capacities of countries like India and Iran are expectedto come online by FY11 and onwards which are likely to convert these countries from dependent importers to potential exporters.

Moreover, this rising trend is expected to be short-lived due to higher interest rates and inflationary concerns are likely to make it disadvantageous for investors to enter the construction industry. In addition to this, to control real estate prices the government isconsidering imposing a tax on it.The recent wave of flooding in the northern Punjab region of Pakistan and displaced 20 million people and also left the area isolated from other parts of the country. Many industrial plants and logistics operations were also adversely affected as a result of massive damage to infrastructure. Analysts expect that the lack of infrastructure, would lead to a decline in sales and prices also result in a decrease of RS10 at Rs20 per bag in the next few months. Sales of cement are influenced by rainfall on an annual basis, but the damage to the road network has deteriorated and distribution industry, agony and hurt exports. However, you can expect the industry to see the light at the end of the tunnel, how could experience exponential growth due to massive reconstruction efforts in the country, once the flood subsides. Although the extent of the damage can not be accurately assessed at this time, reconstruction efforts are likely to last longer in comparison with the aftermath of the earthquake of 2005, due to the nature of the disaster. Investors will likely have a significant interest in cement stocks on the back of strong future demand. Even when the government announced a 50 percent reduction in development spending, the United Nations, World Bank and other donor agencies pledging money for reconstruction activities. Cement industries in Pakistan are currently operating at their maximum capacity due to the boom in commercial and industrial construction within Pakistan. Consumers face a tough decision with regards to prefer which brand over which because of the similar pricing of cement industry. The formation of cartel by the cement manufacturers have exploited local consumers a lot and this has led to the concentrated degree of oligopoly, where the firms are acting as a single unit to perform their monopoly. Their combined market power is simply a diluted version of the dominance that a single firm with a monopoly market share can exert.

The demand of Pakistani cement is expected to continue to grow at the rate of 20 per cent for about four years to come. It may then follow traditional growth rate of seven per cent per year. Announcement of major dams will dramatically increase this demand. Deregulation after accession of Pakistan to WTO is expected to open the window of competition from cheaper markets.

There may be no tariff after this deregulation on import of cement allowing its entry into Pakistan from cheaper market at lower rate. Cement from cheaper markets may also block Pakistans export of cement to its neighboring countries. Global market has vigorously taken up the advantage of economy of scales and multinational giants now control more than 40 per cent of world production(China not included). The recent acquisition of Chakwal Cement by an Egyptian giant, Orascom may be a beginning of such an entry in Pakistan by multinationals.

New avenues for export of cement are opening up for the indigenous industry as Sri Lanka has recently shown interest to import 30,000 tons cement from Pakistan every month. If the industry is able for avail the opportunity offered, it may secure a significant share of Sri Lanka market by supplying 360,000 tons of cement annually.

Future of cement industry in Pakistan:The cement demand would increase in future due to Government policies as the Pakistan Peoples Partys (PPPs) slogan has always been roti, kapra aur makan (bread, clothing and housing). In this regard a statement of the PPP Government confirmed that it would encourage industries and construct small dams. Pakistan's economy, PACRA said grew impressively during last five years with an average GDP growth rate of around 7%. Cement industry has a positive correlation with the GDP growth rate. The major domestic demand drivers are public sector development programs (infrastructure), real estate and industrial construction.But on other hand there are many factors, which can create problems in Pakistan cement industry. According to the experts of Pakistan Credit Rating Agency (PACRA) the cement sector is currently facing severe challenges which originate from a wide range of socio-economic risks including contracting economic activities, and high input costs. These negative developments, along with the prevailing credit crunch and rising interest rates, have further constrained the industry's prospects.

The encouraging economic environment not only energised the local demand but also provided momentum for capacity expansion. Resultantly, the industry added significant capacity recently, while several new production lines are scheduled to commence operations shortly. During this period, the cement manufacturers also established export operations by catering to the growing demand of regional economies. This, while stabilizing the local cement prices, had a positive impact on capacity utilization and margins. Although the local demand reduced significantly in the first quarter of FY 09 (around 15% decline), strong growth in exports has provided support to the industry in the form of largely sustained capacity utilization and price stability. However, given the global export demand is expected to come down.

This would negatively impact the margins and put pressure on local prices that could lead to a price war among producers. The looming supply overhang scenario in the sector could potentially worsen the situation. Profitability of the sector has come under pressure due to high energy cost (comprising around 50% of total raw material costs) and increasing financial expenses. Types of Cement produced in Pakistan:1-Ordinary Portland Cement (OPC)2-Sulphate Resisting Cement (SRC)3-Blast Furnace Slag Cement (BFSC)4-White Cement