There has been an outstanding performance of the industrial sector during the period July 2003-March 2004. According to the State Bank of Pakistan report for the period, large-scale manufacturing registered a growth of 17.1 percent compared to 6.7 percent in the corresponding period of the previous year.
It was mainly due to strong domestic demands and higher exports of the products of the manufacturing sector, primarily related to cement and other construction-related industries.
During the period July 2003-June 2004, total cement sales rose to the level of over 13.63 million tonnes, compared to 11.40 million during the year 2002-03, registering a growth of about 20 percent. Cement sales in the domestic market were 12.516 million tonnes, which is a 14 percent increase, whereas export sales amounted to additional 1.118 million tonnes, a growth of 160 percent over the previous year. Thus, during the year ending 30th June 2004, the cement industry achieved 80.70% capacity utilisation, the highest ever during the last decade.
A number of factors are attributed to this tremendous growth represented by various indicators. Cement exports, mainly to Afghanistan and the UAE, doubled almost every quarter of the year 2003-04, totalling 1.118 million tonnes at the end of the financial year, which accounts for six percent of the total cement production by the industry.
Then, there has been unprecedented rise in the demand for cement in the domestic market, as a result of improved economic conditions, massive undertaking of various development and infrastructure projects at the national level, and the growth of housing activities and civic facilities in the public as well as private sector. Also, the government recently adopted various measures for the accelerated growth of the construction industry, whereas bank loans for construction were already available at lower rates.
As a result of market demands, growth and improved investment climate, the cement industry has embarked upon an ambitious plan to enhance its existing production capacity. Out of a total of 24 cement plants, currently 22 units are operative, all these companies being listed on the Karachi Stock Exchange.
The country at present has an installed capacity of producing 17.55 million tonnes of cement per annum, primarily Portland or grey cement. It is envisaged to increase the total installed annual capacity to about 20 million tonnes, in the first phase, by the year 2006, and further enhancing to a total of 28.21 million tonnes to be realised by the year 2008.
The cement producers, in some cases, have already taken steps for the procurement of plant machinery and equipment whereas in others, the contracts are in the offing.
One of the major cement producers, Lucky Cement Ltd has awarded contract to a Chinese company for the installation of an additional production line of 3,800 tonnes per day capacity that is scheduled to go into production by the year 2005.
In addition, the company is currently undertaking BMR of the two existing production lines that would increase its production capacity to 6,000 tonnes per day of cement. Bestway Cement Ltd, established under foreign direct investment, has recently finalised order negotiations with another Chinese machinery manufacturers to set up a new unit of 3,300 tonnes per day at the same location.
Similarly, D.G. Khan Cement Co Ltd, which has emerged last year as the largest cement producer in the country, plans to enhance its present capacity by putting up another line of 3,800 tonnes per day capacity, in the first phase. Dadabhoy Cement Industries Ltd, which created the confidence in the local industry by placing an order for the first ever locally-manufactured cement plant, are negotiating again with Heavy Mechanical Complex (HMC) for increasing their installed capacity from 1,800 tons per day to 2,800 tons per day.
Also, Pioneer Cement Ltd, for which HMC was the prime contractor for setting up its plant in 1980s, have plans to go shortly for production capacity expansion. Other cement companies also have expansion plans on the cards.
There will be significant additions to the existing cement production capacity through new projects as well. The Galadary Group of UAE is establishing a 2,000 tons per day cement plant, which is currently under an advanced stage of installation by the local cement plant manufacturers. Also, the existing Pak-China Cement plant is being converted, indigenously, by its owners to a white cement plant of 500 tonnes per day capacity.
Cement industry is indeed a highly important segment of the industrial sector that plays a pivotal role in the socio-economic development. It is only logical to undertake capacity expansion of existing capital intensive industries, like cement. It is understood that these cement producers have not undertaken proper detailed feasibility study for contemplating the size of additional production capacity over time. While the proposed capacity expansion has its merit, the cement producers should carry out, preferably jointly, a detailed study for its viability taking into consideration various elements of future market trends, domestically as well as internationally, co-relating with economic variables.
Indeed, any long-term projections could suffer from technological transformations, economic growth development rate, investment climate and other factors. For example, it is anticipated that cement sales would increase to 15 million tonnes during the year 2004-2005, whereas the annual growth in demand in subsequent years would be 10 percent. However, in the absence of a supply/demand-forecast system for cement, these estimates may not be reliable and would depend on a number of limiting factors.
The boom in export market may not continue since it is foreseen that within few years the reconstruction of Afghanistan and Iraq may reach saturation point. Again, the anticipated domestic demand is largely based on the implementation of proposed mega projects such as the Kalabagh Dam or Basha Diamer Dam which have doubtful prospects of construction, at least in terms of a foreseeable time schedule.
In the past, the performance of the cement industry has remained erratic, and domestic demand could not be sustained, in total disregard of the forecast. Historically, the average increase in cement consumption during the last five years or so remained optimally at four percent annually, as reflected from the following data taken from the Economic Survey of the Government of Pakistan.
CEMENT PRODUCTION: Year (30th June) Production (million tonnes) Increase 1997-98 9.364 - 1998-99 9.599 2.5% 1999-00 9.314 (negative) 2000-01 9.674 3.8% 2001-02 9.935 2.7% 2002-03 11.400 14.7%. During these years the cement production capacity doubled, from 8.9 million tonnes to 17.7 million tonnes, in comparison to an average of four to five percent annual growth in demand. It may be observed that the industry suffered huge production and financial losses until the year 2002-03, and it operated much below its installed capacity, at 40 to 66 percent. It only earned a net profit of Rs 2 billion during six months of the 2003-04 fiscal year (July- December 2003).
The government's fiscal and industrial policies applicable to the cement sector are generally considered appropriate, aiming at encouraging an efficient and dynamic private sector, and are likely to continue. At present times, when the government follows deregulation and liberalisation, and bank financing is freely available, it becomes vitally important for cement producers to exercise due care and diligence in planning and embarking on the expansion programme that entails 60 percent expanded capacity. For the same reason, the industry should avoid creating additional capacity at each plant, located in the north or south, without looking into various implications, commercial, strategic and financial.
There is a definite need for the industry to take future investment decisions based on an integrated and well-thought out plan. The reliance on simply the available growth estimates may result in another crisis similar to the early nineties when the industry witnessed a major increase in the production capacity but was unable to market its output, and passed through a difficult period.
The industry may be well advised to reduce its present production cost, at the same time, by improving production efficiency, conversion to coal-firing, employing advanced technology and techniques, developing bulk cement handling systems and adopting other measures in this direction.