The cement industry has had it fair share of ups and downs, but the struggle lately is real. Despite flourishing local demand in construction, bolstered by housing and infrastructure development, it seems market access abroad is fast diminishing. This would hit the bottom-lines faster once the industry enters the phase of overcapacity. On the other hand, fortunately or unfortunately, depending upon which side of the table you sit on, many of the expansions coming up in the north are now hitting snags as Punjab wakes up to the environmental emergency in the region and the devastation some cement companies have managed to dredge up.
To recall, a suo moto case was filed with the Supreme Court (SC), which highlighted that the Katas Raj Temple located in the salt range of Kallar Kahar had dried up. This was a direct result of cement factories located in the area consuming more ground water than they were allowed, causing the water table to deplete. This affected not only the temple itself but the Hindu settlements in the area that depended on this water. Cement companies located there including Bestway, DG Khan, Gharibwal, Pioneer and Maple Leaf were accused of this and Bestway was ordered by the SC to fill up the pond. Estimates by BMA Capital suggest that the restoration of water supply could incur capital expenditure of up to Rs500 million for accused companies over the next few months.
Simultaneously, others concerns have arisen. The Punjab government took note of the excessive use of ground water as well as climate changes and amended the Location Policy under Pakistan Environment Protection Act. Essentially, the amendment requires cement companies to seek mandatory review and approval by Environmental Protection Agency (EPA) before construction. The earlier policy was to go ahead with expansion if the company did not hear from EPA within four months of application.
Furthermore, the Mines and Minerals Department of Punjab (MMDP) prepared a feasibility study to assess the outcome of new or enhanced cement plants in the salt region. The report outlines the criteria for identifying safe (positive) and unsafe zones (negative) for expansions. Those companies already operating in negative zones will have to utilise alternative water resources, while no new expansions would be allowed there.
According to BMA Research, Pioneer and MapleLeaf’s new expansions are in the safe zone; while Gharibwal’s is in the negative zone. However, all the expansions were put on a hold until SC decided on the matter based on a review of the MMDP report. This is due any day now.
Meanwhile, the EPA also acted and stopped construction of the three companies citing non-compliance of Environment Impact Assessment (EIA). However, Mapleleaf took the EPA to court, and LHC ruled in favour of the company. Being in the safe zone, it is only a matter of time until SC releases its decision and the company gets a green light for construction of its 2.2-million-ton expansion. However, Pioneer’s plans (2.1m tons) will get delayed significantly as it fulfills the EIA requirements, while Gharibwal’s expansion (2.4m tons) located in the unsafe zone might have to be scrapped or the company would have to look for a new location.
If expansions are delayed by up to 6-18 months, it would ease the burden of falling retention prices and building overcapacity. As this column has opined, the cement industry is headed toward oversupply as expansions come through, which would lead to lower prices and a drop in margins.
The regulation of cement companies is not limited to expansions. In fact, the Punjab government is streamlining a comprehensive policy to ensure the environmental and social safety of the Punjab whereby strict guidelines would have to be adhered pertaining to water resources, forest and agricultural land and mining leases.