After a gap of over ten years, cement industry in Pakistan has started operating at 100% capacity. The industry had seen a capacity utilisation as low as 54% during the year 1997-98. Later part of nineties had showed either a sluggish growth or no growth in the demand of cement, whereas it has grown @ 15% during 2003-04 and around 20% during the current fiscal year ending June, 2005.
These two years have enabled the cement industry to recover its accumulated losses of over twelve billion rupees, which it had suffered during 1996-97 to 2001-02. During this period the cement industry had witnessed a worst ever crisis, due to demand constraint, unstable cement prices, and unprecedented rise in the prices of Furnace Oil.
Besides GDP, the level of consumption of cement is also a denominator of status of development of an economy. In Pakistan, per capita cement consumption has been one of the lowest in the world. Due to political uncertainties during the nineties, GDP growth, as well as per capita cement consumption had witnessed their bottoms.
Although GDP has been steadily growing for the last few years, its growth @ 8.4% during 2004-05 has been phenomenal. Pakistan is being rated as one of the five Asian economies showing accelerated pace of growth. The surge in cement demand achieved during last two years is nearly 2.5 times of the growth in GDP.
The accelerated growth in demand of cement has inspired the cement companies to go in for expansion in a big way.
The production capacity is expected to touch the level of over 40 million tons in 2008-09 from existing operative capacity of 1.7 million tons. The massive increase in capacity planned by most of the cement companies has caused serious concerns amongst different stakeholders. They apprehend that cement industry might again suffer on account of glut of cement in the near future.
Their apprehension is, however, not correct, because the existing scenario is completely different, than what it was in the nineties. The demand growth now is unprecedently high, whereas it was almost stagnant at that time. The economic indicators are at their best, whereas they were at their worst at that time. The prospects of exports of cement are also very bright compared to nineties due to growing demand and increasing prices.
In all probabilities, the demand of cement will further go up beyond 20%, at least in the next couple of years, mainly due to massive increase in the Public Sector Development Plan (PSDP) of 2005-06 envisaged at rupees 272 billion, construction of dams which have become indispensable and the backlog of household units touching a figure as high as one million and the general improvement in the economy.
The committee appointed by the Government to submit its report on feasibility of construction of dams is due to submit its report by December 2005. In the wake up of rising silt accumulation in the existing dams, the raising of reservoir levels of existing dams have become imminent.
In the back drop of shortage of water expected after a couple of years, a country like Pakistan which is primarily dependent on agriculture cannot survive without building dams. Construction of Kala Bagh and other dams seem to be unavoidable.
It is hoped that the committee will also properly address the concerns of NWFP and Sindh Provinces, before finalising their report, so that the construction of dams which have been pending for so long could materialise.
The export performance of Pakistan has been highly encouraging during last few years. Our export to Afghanistan increased by 160% from 0.43 million tons during 2002-03 to 1.128 million tons during 2003-04. In the current fiscal year Pakistan has exported 1.44 million tons upto May, 2005. It is expected that exports will be touching a level of 1.6 million tons by the end of June, 05.
The sustained growth in economy, boost in construction activities and expected construction of dams will reasonably absorb the new capacities coming on stream in the near future. There will, of course be some surplus capacity even after exports to Afghanistan.
Although current growth of sales volume within country and abroad 20%, but conservatively if the growth in sales is assumed at 15% per annum, there will be a negligible surplus capacity during next three years. Of course, in the year 2008-09 and 2009-10, the surplus will be as high as 12.3 million tons and 8.1 million tons respectively.
The above surplus capacity can be gainfully deployed by accelerating exports to Afghanistan and entering into the export market for Iraq and Gulf States. Afghanistan and Iraq offer great potential for export of cement, because both the countries have seen colossal destruction in the wars they have fought during the last 25 years. The devastation which took place in Afghanistan during the war with Russia could not be made good after the withdrawal of Russian forces, because of tribal feuds between the war lords. In the aftermath of 9/11, the unprecedented bombardment by USA forces, has turned the whole country into rubble.
In view of donations, grants/aids offered by the world community, it looks that Afghanistan will continue to be built for at least next ten years. Similarly, Iraq had indulged in a very long war with Iran. Even after the war was over, Iraq could not undertake rebuilding of the country, because of sanctions imposed by UNO, under the influence of western powers.
In the aftermath of invasion of Iraq by USA led forces and insurgency continuing since its occupation by foreign powers, the country stands devastated. In all probability some stability will start coming in the country after a year or so.
Thereafter, it is expected that massive reconstruction activities will be undertaken in the whole of the country and cement will be required in large quantities in Iraq. Pioneer and Lucky have recently stated exporting cement to Iraq.
UAE in general and Dubai in particular have undertaken mega construction projects which are likely to continue for a very long time. The demand is so huge that this region will have to import cement from different countries, despite the fact that production capacity in Middle East is also increasing, but for economic reasons, they would not like to enhance capacity to such an extent which afterwards may become unviable. Iran is also expanding, but somehow their cement is not preferred in the region, perhaps owing to quality issues.
Unfortunately we do not have bulk cement handling facilities at our ports in Pakistan.
If these facilities are provided at the ports, Pakistan can possibly export entire surplus capacity to Iraq and Middle East. Export Promotion Bureau and Port Authorities should gear up to avail this opportunity which can fetch significant foreign exchange for the country.
Rise in interest rates are likely to affect the profitability of cement companies, particularly of those whose expansion schemes are mainly based on loans.
Companies with low capital cost of expansion, and using their own funds for expansion, like Pioneer Cement will not be hit hard, compared to other companies which are expanding their capacities at higher capital cost and with borrowed funds.
Green field projects will obviously be hit hard, more than all others. While financial charges will be going up due to rise in interest rates, the redeeming factor is that economy of scale at which cement plants will be operating will significantly reduce the cost of manufacturing of cement, and therefore cement companies will generally remain viable even at lower capacity utilisation.
According to an estimate, break even capacity utilisation of cement companies at current price of cement will be ranging from 30% to 45%, which sufficiently speak of the profit potential of the cement companies of Pakistan in the medium tern scenario.
(The writer is Executive Director & CFO, Pioneer Cement Ltd)
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