The cement industry of Pakistan entered the export markets a few years back, and has established its reputation as a good quality product. The latest information is that India will import more cement from Pakistan. So far 130,000 tonnes cement has been exported to the neighbouring country.

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 kept cement offtake growth in double digits.

During the financial year-07, cement sales registered a growth of 31 percent to 17.53 million tonnes as against 13.5 million tonnes sold last year. The cement sales during July-February-08 showed an increase, both in domestic and regional markets to 18.17 million tonnes. The domestic sales registered an increase of 7.2 percent to 14.4 million tonnes in the current period as compared to 13.5 million tonnes last year whereas exports stood at 3.7 million tonnes as against 1.8 million tonnes in the corresponding period last year, showing an increase of 110 percent.

The cement sector is contributing Rs 30 billion to the national exchequer in the form of taxes. This sector has invested about Rs 100 billion in capacity expansion over the last four years. There are four foreign companies, three armed forces companies and 16 private companies listed in the stock exchanges. The industry is divided into two broad regions, the northern region and the southern region. The northern region has over 87 percent share in total cement dispatches while the units based in the southern region contributes 13 percent to the annual cement sales.

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.

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. The operating capacity of cement in FY05 and FY06 was 18 million and 21million tonnes, which rose to 37 million tonnes by the end of FY07.

The cement manufacturers added eight million tonnes to the capacity and the total production was expected to be 45 million tonnes by the end of 2010. It may result in a supply glut of 11 million, nine million and seven million tonnes in 2008, 2009 and 2010 respectively. Despite an excess supply of 11 million tonnes in 2008, it is estimated that the price would increase in domestic as well in regional markets that may surely boost the profitability and give relief to the industry on its new investment.

The cement demand would increase in future due to government policies as the Pakistan People’s Party’s (PPP’s) slogan has always been ‘roti, kapra aur makan’ (bread, clothing and housing). In this regard a statement of the new government confirmed that it would encourage industries and construct small 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 expected to come online by FY10 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 is considering imposing a tax on it.

The export may reach to $ 500 million increase during 2008. Data for the first quarter of FY08 shows that Afghanistan is Pakistan’s largest cement export market. The prospects for cement exports seem bright in the medium term due to rising domestic as well as regional cement demand. Pakistan also achieved improved access to India after the complete removal of the 12.5 percent custom duty on Portland cement imports in this country from January 2007, showing improved export opportunities for Pakistan. India is planning to import more cement from Pakistan to stabilise prices in the market and the government wants a balance in demand and supply of cement in the current fiscal year.

The import of cement from Pakistan has increased manifold during last four months. India has registered a number of Pakistani cement manufacturers, a requirement to facilitate import of cement. Pakistan has already increased the frequency of trains from one to three in a week to carry cement from Pakistan to Wagah border. Due to boom in the construction industry, India needs cement in bulk to meet its growing needs. The success of the sector depends on exports, its profitability from depressed local prices and cost appreciation. The exports for FY08 have already surpassed the last whole year’s export of 3.19 million tonnes and are likely to reach to 6.67 million tonnes in 2008.

The targets for exports for 2009 and 2010 are set to be 9.99 million and 10 million tonnes respectively. Currently, the export demand is expected to be from new inductee India along with other countries like Gulf Cooperation Council (GCC) countries, due to rising oil prices-led economic growth. More countries like South Africa to make the football stadiums for the World Cup and Sri Lanka are also expected to approach Pakistani companies for cement imports. However, export depends on factors such as: ability to produce cement at Rs 85 per bag. Export strategy should be made for at least three years, 2008-10, after which new plant will start production in the region. In the meantime industry should explore new markets for export or ready to lower prices of cement in local market.

The sharp decline in cement prices were due to domestic competition among producers has dampened the profitability of the industry. To cope with this situation the manufacturers have strengthen cartel to set minimum cement prices. The example was marketing arrangement that increased cement prices to the extent of 20 percent despite coal prices have gone down in the international market to $124 from nearly $ 140 in November 2007 to January 2008.

To break-up cartel the Competition Commission of Pakistan raided the offices of Association of Cement Manufacturers of Pakistan and confiscated computers and office record. The association condemned this action and said it is against business norms. They said the commission is blaming cement manufacturers for making a cartel for the last 10 years but could not able to prove it. The capital structure of cement companies may change as most of the expansions during last two to three years have been debt financed and companies are expected to retire these debts rapidly during next three to five years. Moreover, the slow down in economy may occur due to political uncertainty which might result in reducing cement demand in future. However, in case of construction of hydro-powered dams, there will be a sudden jump in the local sales of those companies located near these dams.