Analysis of Pakistani Cement Industry

Group Members:Muhammad Anum Hasan

Nooruddin MuzzaffarZohaib Ali Khan

IBA :BBA 4 – Yr 2005

GLOBAL CEMENT TRENDS

• Shortage of cement world wide• 10-12% of the GDP of many counties worldwide• World spending on construction approximately equals $ 3.2 trillion in 1998.• Economic uplift of developed countries stands

on the infrastructure provided by the cement industry.

• Newly industrialized nations and developing like Turkey & Indonesia have used this industry to

their advantage.

TYPES OF CEMENT

• Ordinary Portland cement (OPC)

• Slag Cement

• Super sulfate resisting cement (SSRC)

• Sulfate resisting cement (SRC)

TYPES OF MANUFACTURING PROCESSES

• Wet processes

• Semi wet process

• Dry process

MANUFACTURING CYCLE

• The quarry

MANUFACTURING CYCLE

• Raw materials

1. Limestone

2. Clay/ Shale

3. Gypsum

MANUFACTURING CYCLE

• Raw milling

MANUFACTURING CYCLE

• Pre-heater and Pre-claimer

MANUFACTURING CYCLE

• The kiln

Click picture for video on milling

MANUFACTURING CYCLE

• The Complete Process

MANUFACTURING CYCLE

• Packaging and distribution

Click picture for video on distribution of cement

HISTORICAL DEVELOPMENT

• Number of plantsNumber of Cement plants in history of

Pakistan

0

5

10

15

20

25

30

1947 1948-58 1958-68 1971-77 1977-88

Years

Nu

mb

er o

f p

lan

ts

HISTORICAL DEVELOPMENT

• Historical growth rate

Historical Growth rate of Cement Industry of Pakistan

-10

-5

0

5

10

15

20

25

19

90

-19

91

19

91

-19

92

19

92

-19

93

19

93

-19

94

19

94

-19

95

19

95

-19

96

19

99

-20

00

20

00

-20

01

20

01

-20

02

20

02

-20

03

20

03

-20

04

Years

Perc

en

tag

e

Gro

wth

rate

SIZE AND TRENDS

• Total plants are 24

• Out of 24, 22 are operative

• 17 are listed on KSE

• Capacity utilization 85-100% june30,2004 (EBR-Dawn)

• Fuel conversion

• Capacity expansion of 13 million tons going online from FY05-FY09

SIZE AND TRENDS

• Demand and supply gap restricts profit growth

SIZE AND TRENDS

• Sustainability of demand growth

SIZE AND TRENDS

• Capacity expansions • Test for cement cartel• Reduction in profits • Reduction in capacity

utilization

SIZE AND TRENDS

• Per capita consumption of cement

0

100

200

300

400

500

600

700

800

900

1000

Kg

Taiwan J apan Thailand Malaysia China Egypt USA Philippine Indonesia Srilanka India Pakistan

Countries

Per Capita Consumption of Cement

SIZE AND TRENDS

• Cement exports

Cement Exports

0

2000

4000

6000

8000

10000

12000

2000-01

2001-02

2002-03

Years

Va

lue

in

00

0 U

S$ Cement

White

CementClinkers

CementPortlandOthers

TOTAL

CEMENT CARTEL-APCMA

• Formed in 1998

• Restricts quotas daily

• Formed due to extremely bad condition in 90’s

• Business arrangement Vs cartel

FACTORS AFFECTING DEMAND CONDITIONS

• Derived demand

FACTORS AFFECTING DEMAND CONDITIONS

• Growth in housing sector

1. Increase in liquidity

2. Home loans and house financing schemes

3. Policies of Government of Pakistan

4. Policies of State Bank of Pakistan

FACTORS AFFECTING DEMAND CONDITIONS

• Growth in exports

1. Reconstruction of Afghanistan

2. Export rebates

3. Lower competition with Iran

4. Competitive prices

5. Good quality

6. Expenditures by developing countries

FACTORS AFFECTING DEMAND CONDITIONS

• Infrastructure development

1. Projects taken by the government of Pakistan (Gwadar, highways, dams)

FACTORS AFFECTING DEMAND CONDITIONS

• Low per capita consumption

• Wars

• Disasters

FACTORS AFFECTING SUPPLY CONDITIONS

• Availability of raw materials

• Imported machinery

• Fuel conversion

• Government duties

• Export distribution

• Low interest rates

FACTOR CONDITIONS

•Human resources

•Related and supporting industries

•Machinery

•Infrastructure

CONTRIBUTION TO GDP

•Share in GDP ( % age):

Construction - 3.5

Housing - 6.0

•Contribution to Employment:

Construction Sector Share 2.50 million

•Globally one of the Largest Industry:

It accounts to 10 - 12 % of GDP in some countries.

STRENGTHS

•Ideally located cement plants not only provides self- sufficiency but also earns handsome foreign exchange.

•Almost all the plants are located at a distance from the main pollination centers which means no relocation of the plants.

•Provide High Quality of cement to the consumers.

•Most of the Plants have been converted to either Gas or Coal.

•Abundant reserves of coal will ensure low cost fuel.

STRENGTHS

•Raw materials locally available.

•Privatization of the State owned factories cause an increase in the efficiency and better allocation of resources.

•Access and proximity to the potential markets.

•It not only helps the Construction industry but it also forms the backbone of the mining industry.

•Most of the factories are in the hands of renowned industrial groups.

•There is a potential of power generation.

STRENGTHS

•One of the few industries will shifts capital from urban centers to lesser developed regions.

•Increasing trends of urbanization and skyscrapers.

•The time is changing. Cement is now being used in constructions in rural areas as well.

•Better substitute to the bricks.

WEAKNESSES

•High Taxation Rate

•High Transportation Costs.

•Fluctuating Prices.

•The industry itself does not stimulate the economy. It is the other way. The industry depends upon the situation of the economy.

•Some of the factories using the old wet process.

WEAKNESSES

•Friction between the unions and the management in various State factories.

•Government fixes the price of cement produce by its own factories.

•Mismanagement at state factories.

•No new variant of cement produce.

•Underutilization of capacity

•Raw materials supply problems.

•Distribution network is poor.

OPPORTUNITIES

•Huge potential of exports, due to

•Rehabilitation process in Afghanistan and Iraq.

•Exports to Tsunami effected countries.

•Huge markets in G.C.C. is explored.

•Exports to C.I.S if there is better connectivity and

better ties.

Exports

OPPORTUNITIES

Domestic Demand

•Growing Economy.

•One of the lowest per capita consumption.

•Rising Living Standards.

•Construction of Mega Projects in the country

like Dams, Motorways, Bridges and Power Stations.

•Investment in Housing sector by the oversees Pakistanis.

•Gawader City.

THREATS

•Increasing usage of cement substitutes.

•Insistent Government Policies.

•Law and Order Situation in Afghanistan and Iraq.

•Bilateral relations with the C.I.S.

•Law and Order situation in Baluchistan and elsewhere.

•Competition from Iran and other regional players not only in the foreign markets but also in the domestic markets after WTO.

PORTER’S COMPETITIVE FORCES

Bargaining Power of Buyers:

•Buyers due have the bargaining powers if the volume bought is huge.

•Government mostly buys the lowest bidder.

•Small buyers have little bargaining power.

•Bargaining power of the buyers increase in off season or when the demand is low.

PORTER’S COMPETITIVE FORCES

Bargaining Power of Suppliers:

•Many factories own their mines or are place very near top available raw material source mainly limestone.

•Suppliers have very little, in fact no bargaining power since the plants are locates far off and the factory owners are quite strong.

PORTER’S COMPETITIVE FORCES

Rivalry Among Competitors;

•There is hardly any rivalry among the competitors. Instead the competitors have made a cartel by the name of All Pakistan Cement Manufacturers Association (APCMA)

PORTER’S COMPETITIVE FORCES

Threat of New Entrant:

• Low chances of new entrant due to high capital requirement, suitable location, easy access to markets and raw materials.

• Most of the Plants work under capacity.

• New building material threat is minimum.

ISSUES AND PROBLEMS

• High Price of Cement

• There is under capacity usage yet there are expansion plans across the industry.

• Conflict between the unions and the management.

• High Utility costs.

• Environmental Problems

• Safety Standards.

• Price Control of State Factories by the Government.

• Heavy Taxation.

ISSUES AND PROBLEMS

ISSUES AND PROBLEMS

High Prices of Cement

•The cement cartel made up has led to the demand-supply manipulations by the manufacturers and resulted in massive gains for them.

•There has been recent price hike in January of 15 – 25 %. Which means around R.s 50 per 50 kg bag.

ISSUES AND PROBLEMS

•There is under capacity usage yet there are expansion plans across the industry.

•Mills owner cry out there is low demand and they operate at low profit margins. If the profit margins are low and the demand too then why should there be expansion.

•Capacity Utilization:

Bestway Cement: 109%

D.G Khan Cement and Lucky Cement 103 %

ISSUES AND PROBLEMS

High Utility Costs

•This industry requires a lot of energy . However, the international oil prices has soared to their record prices which had hurt the industry.

•However, the prudent owners have already converted from oil to gas or coal powered plants.

ISSUES AND PROBLEMS

Environmental and Safety Concerns

•The Safety records are very poor in the industry.

•It is one of the most polluting industries. However, no concrete steps are being taken to address this issue.

•Government has included this industry in the list of industries having the risk of child labor. However, there is no child labor issue up till now.

ISSUES AND PROBLEMS

Heavy Taxation.

•Various taxes under different heads cumulatively constitutes to 37 % of the cement prices.

•The taxation is highest in the region.

Philippines and Indonesia 18%

Thailand 7%

Egypt 10%

Iran Nil

CRITICAL SUCCESS FACTORS

• Infrastructure development

• U.S invasion of Afghanistan and Iraq

• Conversion of plants

• Lower corporate interest rates

• Disasters

• Demand-supply manipulations

CRITICAL SUCCESS FACTORS

GOVERNMENT’S ROLE

• Taxes

• Licenses

• Quota regulated industry and the support to the cartel

• Export incentives

COMPARISON WITH CHINA

• Chinese Cement Industry: Background

• Organization of the industry

• Production

• Cement Plants

COMPARISON WITH CHINA

• Cement Markets

• Prices

• Transportation

• Trade

COMPARISON WITH INDIA

• Indian Cement Industry: Structure

• Usages

• Production

• Prices

COMPARISON WITH INDIA

• Players

• Transportation

• Capacity additions

• Industry inputs

RECOMMENDATIONS

• Imposition of minimum requirements on cement manufacturers

• More infrastructure projects

• Research and Development

• Use of cement instead of asphalt

RECOMMENDATIONS

• Foreign investment and transfer of technology

• Reduction in government levies

• Need for web presence

• Reduced ship loading/unloading time

RECOMMENDATIONS

• Easier procedures at the port to enhance the export potential