Cement import and the subsidy

The decision for the import of cement was prompted by an increase in cement prices at some places in early April, 2006. This increase in prices had two reasons. Because of the year end, the Government departments started buying cement in large quantities to use the budget allocation for that year.
The dealers network took undue advantage of this sudden demand from the government and increased the prices of cement substantially. At the same time, one or two plants had developed some mechanical faults and a shortage in supply of cement occurred for about a week. Both these factors increased the prices of cement to almost Rs 380/- in some of the towns of the Punjab.
Without looking at the reasons and duration of this increase in prices, the Economic Committee of the Cabinet took an untimely decision in April, 2006 to allow import of unlimited quantity of cement from anywhere in the world without import duty and grant of a subsidy of Rs 1,200/- per ton of cement on transportation.
The decision was taken at a time when the cement prices had already started falling. At most of the places, the prices of cement had gone down by Rs 30/- to Rs 40/- per bag. In Peshawar and other places in NWFP, for example, the prices come down to Rs 320/- per bag when the decision was announced.
After the announcement of ECC's decision, the cement demand has also shown a declining trend in the country as the construction work slowed down due to wheat harvesting.
The rainy season further reduced the demand. On the other hand, the supply has increased substantially. The prices of cement have come down to Rs 260/- to Rs 280/- per bag in different parts of the country.
The ECC's decision will have multiple effects on the country's economy. A lot of foreign exchange will be spent on imports and the subsidy of Rs 1,200/- per ton will be a heavy burden on budgetary resources.
On the other hand, the foreign exchange earning temporarily stopped due to discontinuation of exports to Afghanistan for one month. Pakistan had established a market in Afghanistan by a lot of efforts. The country is likely to lose the market permanently because cement in Afghanistan has already started arriving from Kargistan. If Iran also starts sending its cement to Afghanistan, we will lose our market permanently.
If the Government of Pakistan wanted a reduction in the prices of cement, it could have been achieved easily by withdrawing excise duty from local cement which is presently charged at Rs 750/- per ton in Pakistan. By the way, this is the highest excise duty in the region. In any case, the prices are also coming down because of a reduction in demand and possible increase in supplies.
In case, cement is imported free of duty and with a subsidy, the new expansions made with investment of billions of rupees will come into financial trouble. Pakistan had an installed capacity of 17,908,550 tons on 30th June, 2005. It increased to 24,304,250 tons on 30-06-2006 by 35%. Another expansion of 11,670,000 tons is in pipeline. It is therefore necessary in the larger interest of the country's economy to withdraw ECC's decision.
The budget documents show a trade deficit as well as deficit in foreign exchange. The continuous import of cement and a provision of subsidy of Rs 720 million on imports is having a drain on our budget. Recently, some cement has been imported from abroad which is reported to have 4.25% MgO against the MgO of 4.00% allowed by Pakistan Standard PSS 232-1983 (R).
This standard was formulated in 1983 when almost all the cement plants in the country were based on wet process. The standard allows a maximum expansion of 10 mm. The things have now changed. All the present plants in the country are run on modern dry process. The cement produced by the present plants have less than 2% MgO.
The expansion of this cement does not exceed 1.5mm to 2mm. The government can check this from the record of TCDRI, Lahore. Any imported cement with 4.25% MgO will have very high expansion. This will be disastrous for our construction industry. The import of such cement should not be allowed to enter the country in the larger interest of our construction industry. Any cement with expansion of more than 2mm will adversely affect the stability of construction structures.
After import of high MgO cement in bulks the traders in Pakistan imported bagged cement as well.
The customs authorities did not allow the release of the cement as it did not meet the Pakistan Standard PS:232:1983 (R) for Ordinary Portland Cement. However, subsequently, the Government directed the customs authorities to allow the release of cement under Pakistan Standard PS-3047-1991. This standard is for Portland Pulverised- Fly Ash Cement and not for Portland cement it can contain as much as 35% of fly ash.
The Government should take immediate steps to stop such imports not only to reduce trade deficit and foreign exchange deficit but should spend the amount of Rs 720 million allocated for subsidy on development of country's infrastructure specially when the prices of cement have come down to Rs 260/- to Rs 280/- per bag.