Final Cement File

8/14/2019 Final Cement File

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Analysis of Pakistani Industries

TERM REPORT

Spring09

Cement Industry of Pakistan

Submitted by:

Hussain Dawood (5429)

Saad Masood Baghpati (5955)

Syed Haider Raza (6014)

Muhammad Adeel (5941)

Ahmed Ashraf (5999)

Section C (tue/thur, 12:30-2:00)

Faculty: Dr. Irshad Khan

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Table ofContents

Acknowledgement.. 2

Letter of Authorization 3

Letter ofTransmittal.4

Introductory Articles.. 5

Executive Summary.. 12

Introduction.. . 14

History of Cement Industry ..............................................................................16

Cement Plants in Pakistan ...............................................................................17

Overview of the Industry ...............................................................................18

Cement Industry Present Scenario..................................................................22

Findings and Discussions ..................... ........................ ...................... ............... ..23

Cement Industry - Porters Model ...................... ........................ ...................... ..24

SWOT Analysis .............................................................................................. 25

Local Demand Drivers ...................................................................................... ..28

Burdens on Cement Sector ............................................................................... ..30

Controversial Issues........................................................................................ 31

Geographical Profiles .......................................................................................33

Issues of the Year.............................................................................................37

Companies on the KSE. .................... ...................... ...................... ..................... .38

Future Outlook .. ................. ........................ ....................... ....................... ..... ..41

Bibliography: .................................................................................................... 44

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Acknowledgement

We would like to express our gratitude to the instructor of t h e c o u r s e , Analysis

of Pakistani Industries, Dr. Irshad Khan for providing us the chance to work on

this project and practically analyze all that we had studied during the semester. This

has definitely been a exceptional learning experiencefor us. This report has been very

helpful providing us the opportunity to apply the theoretical c onc ep t s and

enhance the learning of the analytical aspects of the course.

We are very thankful to Dr. Irshad Khan for his guidance and help which he has

extended through out the course an d ha s ma d e th e co ur se very inform ative ,educational and also entertaining for us.

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Letter of Authorization

The term report on Cement Industry of Pakistan has been authorized by the instructor of

the course Analysis of Pakistani Industries, Dr. Irshad Khan.

The report is assigned to gain insights regarding the Pakistani cement industry as well as to

critically evaluate the sectoral performance of the cement industry.

The report has proved to be extremely beneficial in terms of enhancing our ability to

perform critical diagnosis of industry trends and potential based on historic performance as

well as develop analytical skills to forecast industry performance in the future based on

economic, political, technological and social forces, thus leading to a better understanding

of the course.

Yours Sincerely,

Hussain Dawood

Saad Masood Baghpati

Syed Haider Raza

Ahmed Ashraf

Muhammad Adeel

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LETTER OF TRANSMITTAL

Dr. Irshad Khan,

We are immensely grateful to you for providing us the opportunity to practically witness

the different concepts regarding the critical evaluation of industrial performance and

sectoral operations.

The lectures have proven to be extremely fruitful in giving us the practical insights and

knowledge regarding the course. Your teaching methodology, which encompasses up-to-

date lectures with a broad spectrum of articles and research cases have been a great

contribution to making the course as interesting as possible for us.

We are sure that, your dedication and commitment towards us being able to develop the

necessary analytical skills will be of great help to us in our careers.

We hope that our effort to complete the report in due time and in a comprehensive and

detailed manner, will reflect in the report and that it will live up to your expectations.

If you have any queries regarding the report, kindly let us know as well would love to clear

any doubts/questions as well as appreciate your suggestions towards this project.

Yours sincerely,

Hussain Dawood

Saad Masood Baghpati

Syed Haider Raza

Muhammad Adeel

Ahmed Ashraf

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'Cement industry to collapse if not rescued': prices already on higher side

MUSHTAQ GHUMMAN

ISLAMABAD (April 12 2009): The country's cement industry is understood to have

conveyed its woes to the government saying that it would collapse if financial benefits

were not extended to it in the next budget. "Reduction in PSDP, high cost of energy, high

interest rate, and Rs 96 per bag tax are some of the reasons of decline in the cement

industry," sources said.

However, analysts term cement manufacturers' claim as an effort to harvest more financial

gains by understating some of the facts, which is challengeable. Recently, the Ministry of

Industries and Production had indicated the possibility of decrease in cement prices as

Advisor to Prime Minister on Finance Shaukat Tarin repeatedly stated in the ECC meetings

that the impact of reduction in prices of coal and other inputs were not being passed on to

the consumers by cement manufacturers.

Cement industry is of the view that the cost of one bag cement, inclusive of all duties andtaxes, is Rs 358, whereas it is being sold at Rs 340, which means that manufacturers are

already facing a loss of Rs 18 per bag. "Without concerted efforts, cement industry will

collapse," sources quoted All Pakistan Cement Manufacturers Association (APCMA) as

saying in its presentation recently given to one of the Finance Ministry's official, who is

personally following the case.

In the presentation, a copy of which is available with Business Recorder, the APCMA has

tried to convince the concerned officials that the industry is about to die, because of taxes

imposed on it. "High inland costs of transportation and port handling make sea exports

non-viable for the plants based in the north, which account for most of 10.59 million tonssurplus capacity," the association said.

On the other hand, Ministry's per bag calculation tells a completely different story.

"APCMA's claimed per bag cost is fictional, and the calculations being carried out by the

Industries Ministry speak the truth," sources said. The Competition Commission of

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Pakistan (CPP) is also in the process of taking action against the cement manufacturers as

the Commission says it has enough proof of cartelization.

The establishment of mobile courts, dropped after charges of their possible abuse for

political victimization, had the objective of keeping a close eye on profiteering, said

Minister for Labor and Manpower Khurshid Shah in an interview. In July last year, the

government intended to launch a crackdown on cement manufacturers against raising

prices to over Rs 400 per 50 kg bag without any justification. But the plan was shelved on

top level intervention.

According to some officials in Finance Ministry, who attended the ECC meeting,

prevailing cement prices are still on the higher side, and the government may fail to contain

inflation if prices of cement and other essential items are not reduced. Cement price in the

federal capital is Rs 349 per 50 kg bag, but in Quetta it is Rs 410 per bag. The CCP, which

was also conducting investigations against cement manufacturers, has already intimated to

the concerned quarters that it was under severe pressure from the cement 'cartel'.

Business Recorder, 2009

Pakistan cement industry seeks alternative overseas markets

Tuesday, 10 Feb 2009

Business recorder reported that Pakistans cement industry is seeking an alternate export

market other than India, as it has not exempted the import duty on Pakistani cement, whichis damaging the exports of the sector.

Industry sources said that Pakistan's cement industry has now decided to completelyabandon the cement exports to India citing unfavorable business environment. Exports toIndia during January 2009 were recorded significantly lower at 10,000 tonnes, due to theimport duty on cement, which has made the imported cement unattractive in Indian market.

Trade of the commodity between the two countries has also been significantly affectedfollowing the Mumbai attacks hampering the relations between the two countries.However, cement exports continue to depict healthy growth and were recorded at the level

of 784,000 tonnes during the month, a decent growth of 26% on yearly basis. Cumulativeexports for the first 7 months period from July to January 2009 also witnessed a significantupsurge of 62% to 5.87 million tonnes versus 3.62 million tonnes in the same period of2008.

Mr Muhammad Rehan Khan, an analyst at First Capital said that on monthly basis cementexports registered a growth of 26%. The weight of sea based cement exports duringJanuary 2009 was recorded at 70% in overall cement exports as compared to 68% in thesame month of last year.

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However, the domestic cement demand is likely to record higher volumetric sales duringJanuary 2009 as compared to the preceding month. The double digit growth in monthlydispatches is due to the lower volumetric sales recorded during December 2008 on accountof lesser working days during the month.

Future of Cement Industry

Ismat Sabir - May, 2008

The cement industry of Pakistan entered the export markets a few years back,

and has established its reputation as a good quality product. The latest information is that India will

import more cement from Pakistan. So far 130,000 tonnes cement has been exported to the

neighbouring country.

The last few years have been a golden period for cement manufacturers, when the

overnment increased spending on infrastructure development. High commercial activity

nd rising demand for housing on account of higher per capita income has kept cement

offtake growth in double

digits.

During the financial year-07, cement sales registered a growth of 31 percent to 17.53

million tonnes as against 13.5 million tonnes sold last year. The cement sales during July-

February-08 showed an increase, both in domestic and regional markets to 18.17 million

tonnes. The domestic sales registered an increase of 7.2 percent to 14.4 million tonnes in

he current period as compared to 13.5 million tonnes last year whereas exports stood at 3.7

million tonnes as against 1.8 million tonnes in the corresponding period last year, showing

an increase of 110 percent.

The cement sector is contributing Rs 30 billion to the national exchequer in the form of

taxes. This sector has invested about Rs 100 billion in capacity expansion over the last four

years. There are four foreign companies, three armed forces companies and 16 private

companies listed in the stock exchanges. The industry is divided into two broad regions,

the northern region and the southern region. The northern region has over 87 percent share

in total cement dispatches while the units based in the southern region contributes 13

percent to the annual cement sales.

The cement demand grew 19 percent and 13 percent during FY05 and FY06 respectively.

During the first nine months of FY07-08, production increased by 30 percent as compared

to last year. The demand for cement was forecasted to grow by 26 percent during FY07

and 17 percent in FY08. The per capita consumption of cement has risen from 117 kg in

FY06 to 131 kg in FY07.

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The main factors behind increase in demand of cement were: 60 percent higher Public

Sector Development Projects (PSDP) allocation, seven percent GDP growth, increasing

number of real estate development projects for commercial and residential use, developing

export market and expected construction of mega dams. The operating capacity of

cement in FY05 and FY06 was 18 million and 21million tonnes, which rose to 37 million

tonnes by the end of FY07.

The cement manufacturers added eight million tonnes to the capacity and the total

production was expected to be 45 million tonnes by the end of 2010. It may result in a

supply glut of 11 million, nine million and seven million tonnes in 2008, 2009 and 2010

respectively. Despite an excess supply of 11 million tonnes in 2008, it is estimated

that the price would increase in domestic as well in regional markets that may surely boost

the profitability and give relief to the industry on its new investment.

The cement demand would increase in future due to government policies as the Pakistan

Peoples Partys (PPPs) slogan has always been roti, kapra aur makan (bread, clothingand housing). In this regard a statement of the new government confirmed that it would

encourage industries and construct small dams.

As cement capacity is increasing to cater the rising domestic and regional demand, it

started facing a tougher time because of price fall after the first quarter of FY06 due to

increase in supply, energy prices started surging and higher expansion led to mounting

finance and depreciation costs. After reaching Rs 430 per bag at the retail level earlier last

year, cement prices fell sharply during 2007.

Average cement prices were Rs 220 per bag as on April 27, 2008, as compared to Rs 315

per bag in 2006. However, the cost and exports may be affected due to weakness of the

US dollar causing coal, electricity charges and freight prices, comprising 65 to 70 percent

of the cost. The PSDP allocation has been cut by Rs 75 billion and feared further cuts

would curtail cement demand. Major capacities of countries like India and Iran are

expected to come online by FY10 and onwards which are likely to convert these countries

from dependent importers to potential exporters.

Moreover, this rising trend is expected to be short-lived due to higher interest rates and

inflationary concerns are likely to make it disadvantageous for investors to enter the

construction industry. In addition to this, to control real estate prices the government is

considering imposing a tax on it.

The export may reach to $ 500 million increase during 2008. Data for the first quarter of

FY08 shows that Afghanistan is Pakistans largest cement export market. The prospects for

cement exports seem bright in the medium term due to rising domestic as well as regional

cement demand. Pakistan also achieved improved access to India after the

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complete removal of the 12.5 percent custom duty on Portland cement imports in this

country from January 2007, showing improved export opportunities for Pakistan. India is

planning to import more cement from Pakistan to stabilise prices in the market and the

government wants a balance in demand and supply of cement in the current fiscal year.

The import of cement from Pakistan has increased manifold during last four months. India

has registered a number of Pakistani cement manufacturers, a requirement to facilitate

import of cement. Pakistan has already increased the frequency of trains from one to three

in a week to carry cement from Pakistan to Wagah border. Due to boom in the construction

industry, India needs cement in bulk to meet its growing needs. The success of the sector

depends on exports, its profitability from depressed local prices and cost appreciation. The

exports for FY08 have already surpassed the last whole years export of 3.19 million

tonnes and are likely to reach to 6.67 million tonnes in 2008.

The targets for exports for 2009 and 2010 are set to be 9.99 million and 10 million tonnes

respectively. Currently, the export demand is expected to be from new inductee India along

with other countries like Gulf Cooperation Council (GCC) countries, due to rising oil

prices-led economic growth. More countries like South Africa to make the football

stadiums for the World Cup and Sri Lanka are also expected to approach Pakistani

companies for cement imports. However, export depends on factors such as: ability to

produce cement at Rs 85 per bag. Export strategy should be made for at least three years,

2008-10, after which new plant will start production in the region. In the meantime

industry should explore new markets for export or ready to lower prices of cement in local

market.

The sharp decline in cement prices were due to domestic competition among producers has

dampened the profitability of the industry. To cope with this situation the manufacturershave strengthen cartel to set minimum cement prices. The example was marketing

arrangement that increased cement prices to the extent of 20 percent despite coal

prices have gone down in the international market to $124 from nearly $ 140 in November

2007 to January 2008.

To break-up cartel the Competition Commission of Pakistan raided the offices of

Association of Cement Manufacturers of Pakistan and confiscated computers and office

record. The association condemned this action and said it is against business norms. They

said the commission is blaming cement manufacturers for making a cartel for the last 10years but could not able to prove it. The capital structure of cement companies may change

as most of the expansions during last two to three years have been debt financed and

companies are expected to retire these debts rapidly during next three to five years.

Moreover, the slow down in economy may occur due to political uncertainty which might

result in reducing cement demand in future. However, in case of construction of hydro-

powered dams, there will be a sudden jump in the local sales of those companies located

near these dams.

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Cement dispatches cross 2.25m MT in March

LAHORE April 4 2007: The month of March has witnessed highest-ever dispatches in the

history of cement industry of Pakistan and both the local and export dispatches were

recorded at 2,281,816 metric tons, as comparing with 1,823,496 of March last year, a

growth of 25.13 percent.

Sources in All Pakistan Cement Manufacturers Association (APCMA) said the figures of2.1 million tons of cement sales, as reported in a section of press, are not correct and actual

sales have crossed the touched the barrier of 2.28 metric tons.

According to figures available with Daily Times, local dispatches during March 2007 stood

at 1,910,678 metric tons against 1,643,153 metric tons of last year, a growth of 16.28

percent. On exports front, the dispatches were recorded at 371,138 metric tons in March

2007 against 180,343 metric tons of March last year, a growth of 25.13 percent. It may be

noted that the cement industry dispatches had touched the level of 2 million metric tons in

the month of January 2007 but the March figures have registered record levels in the

history of cement industry.

As far as last nine months dispatches are concerned, the local ones have reached to

15,380,297 metric tons against 12,192,840 metric tons of last year, registering a growth of

26.14 percent. On exports side, the dispatches during last nine months have reached to

2,145,487 metric tons against 1,157,250 metric tons during corresponding period,

witnessing a growth of 85.40 percent.

The overall dispatches during last nine months have reached to 17525784 metric tons

against 1335090 metric tons of first nine months of last fiscal year, growing by 31.28

percent.

It may be noted that the cement industry production capacity has reached to the level of 3.3

million tons per annum and the industry experts are predicting some overall 30 percent

growth in cement dispatches by the year-end.

Particularly, both the D G Khan Cement and the Maple Leaf Cement are expected to run

on full capacity by middle of April that would bring further growth to the industry

dispatches.

On exports front, the industry has seen impressive growth and it has shipped 18,600 metric

tons cement to India alone in last month. The industry sources believe that this figure could

be improved further if the government allows by road shipment of cement to India.

Similarly, export to Iraq, Iran, Afghanistan and UAE is growing exceptionally.

Industry sources are of the view that announcement regarding development Lai Nullah

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would also give boost to industry production. They have given credit to President

Musharrafs consistency in policies behind tremendous growth in industry.

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E x e c u t iv e Summary

Our short research based paper summarizes the key points about what has

been happening in the Pakistan cement industry and what future holds for it, if

the growth continues the same way.

Cement exports of the country continues to depict healthy growth and wererecorded at the level of 913,000 tonnes during the month of November thattriggered massive growth of 61 per cent on year on year (YoY) basis. While,cumulative exports for the five months period (Jul-Nov 2008) also witnessed asignificant upsurge of 70 per cent at the level of4.4 million tonnes versus 2.6million tonnes in the same period of last year.

The low domestic cement demand in the country is due to the political

uncertainty. He said cement exports from Pakistan would remain buoyant in

coming future despite the world economic downturn and global financial crisis as

Middle East has still huge demand of cement. Oil producing countries of the Middle

East would require massive housing and construction works in years to come

hence, a huge demand of cement is still present. Segregating the data, weight of

sea based cement exports during the month was recorded at 66 per cent in overall

cement exports if compared with 52 per cent in November 2007. Furthermore,

cement exports to India during the month were recorded at 67,000 tonnes, which

is lower when compared with the previous monthly average of 100,000 tonnes.

However, following the recent terror attacks in Mumbai, the Indian cement

industry is now sensing an opportunity to demand a curb on Pakistan cement

imports. In this regard, Indian cement industry is now approaching Indiangovernment to review its trade talks with Pakistan with respect to cement, which

could probably lead to a decline in Pakistan cement exports to India.

According to the provisional cement data, overall industry dispatches are likely to

witness a decline of 3 per cent during the month of Nov 2008 at 2.5 million

tonnes versus the same month last year.

On cumulative basis, cement dispatches during the first five months of FY09(Jul-Nov

2008) is estimated to depict 2 per cent nominal increase at 12.3 milliontonnes as compared to 12 million tonnes during the same period

of last year.

The rise in cumulative cement dispatches is solely attributable to rising export

volumes as domestic demand has remained depressed. Increasing regional

cement demand from countries like Afghanistan, Middle East and African

countries fuelled the export demand growth during the period. Utilisation level

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dropped to 80 per cent of the capacity In November 2008, cement plants of the

country operated at 80 per cent capacity utilisation level as compared to 83 per

cent in the same month of last year. While, overall utilisation levels for Jul-Nov

2008 recorded at 79 per cent as against 78 per cent in the corresponding period of

previous year.

Local demand recovered in Nov on MoM basis: Local demand is likely to record

highervolumetric sales as compared to the previous month. The local

cement dispatches registered an increase of 4 per cent at 1.6 million tonnes

during November 2008 versus 1.5 million tonnes in the previous month. On YoY

basis this represents a heavy decline of21 percent.

In aggregate, the domestic cement dispatches for 5MFY09 were recorded at 7.9

million tonnes, depicting a decline of 16 per cent YoY. Segregating the data,

Northern cement manufacturers led local dispatches with 1.3 million tonnes as

compared to 232,000 tonnes for the southern zone during the period under review.

Introduction

Cement industry is indeed a highly important segment ofindustrial sector that

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plays a pivotal role in the socio-economic development. Though the cement

industry in Pakistan has witnessed its lows and highs in recent past, it has

recovered during the last couple ofyears and is buoyant once again.

The cement industry in Pakistan has come along way since independence when the country

had less than half a million tones per annum production capacity. By now it has exceeded

10 million tones per annum as a result of establishment of new manufacturing facilities and

expansion by the existing units. Privatization and effective price de control heralded a new

era in which the industry has reached a level of surplus production.

The cement industry in Pakistan faces two serious threats: closure of units based on wet

process, and poor cash flow rendering the units incapable of debt servicing due to

increasing cost of electricity, furnace oil and imported craft paper used for cement packing.

The cost of furnace oil alone has increased by nearly 100%. With the increase in furnace

oil the increase in electricity tariff has also become inevitable.

Pakistan has remained a net importer of cement but due to privatization of units operating

under state control and subsequent expansion programs by new owners supported by

financial aid has pushed the industry to a point where the country is bound to reach an over

supply situation. However, the recent increase in energy cost provides opportunity for the

efficient units based on dry process to sustain the situation for a relatively longer period.

Pakistans cement market is divided into two distinct regions, North and South. The

northern region comprises the Punjab, NWFP, Azad Kashmir and upper parts of

Balochistan, whereas the southern region comprises the entire province of Sindh and lower

parts of Balochistan. Traditionally the southern region has always been surplus in cement

production but with the establishment of more plants in northern parts of the country the

region has become almost self-sufficient in supply of cement.

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H i st ory of C e m en t Industry16


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The history of cement industry in Pakistan dates back to 1921 when the first

plant was established at Wah. At the time of independence in 1947, there

were four cement factories with an installed capacity of 470,000 tonnes per

annum. These units were located at Karachi, Rohri, Dandot and Wah. In 1956,

Pakistan Industrial Development Corporation (PIDC) established two plants at

Daudkel and Hyderabad and subsequently more plants were established in the

private sector.

The industry was nationalized in 1972 and the State Cement Corporation of

Pakistan (SCCP) was established following the Economic Reforms Order,

1972. As a result ofnationalization, a total of 10 cement units with an installed

capacity of 2.8 million tonnes per annum were transferred to the SCCP. Effective

price control was also vested with the SCCP and for a long time the industry

operated under a regime of strict regulation and price control. While the cement

industry was working under state control, the SCCP established five new unitswith an installed capacity of 1.8 million tonnes perannum.

In 1985-86, the cement industry was deregulated and private sector was

allowed to establish cement plants. However, bulk of the capacity was

controlled by the SCCP, which had effective control in the fixation of prices.

Severe shortage of cement and price deregulation prompted the private sector to

establish more plants. Seven units were established in the private sector before

commencement of the process ofprivatization in 1991.

During the regime of Nawaz Sharif, the industry went through major

transformation. The government embarked upon an ambitious privatizationprogramme and eight units have been privatized so far. The SCCP at present

controls less than 25% of the total installed capacity in the country, which is

shrinking with the establishment of more plants in the private sector and

expansion in the privatized units. The units working under the SCCP control are

old and inefficient using 'wet process' whereas the units established in the

private sector are new, efficient and use 'dryprocess'.

Cement manufacturing is a high capital- and energy-intensive industry. The

capital cost of a 2000 tonnes per day (TPD) plant ranges between Rs. 3.5

billion to Rs. 4billion whereas the capital cost of a 3000 TPD plant is estimated

at more than Rs. 5.5 billion. Energy consumption by cement manufacturing units

based on 'wet process' is higher as compared to dryprocesses. The 'dry process'

is estimated to be economical by 40% to50% compared to 'wet process'.

C e m en t P la n t s in Pakistan

S.No Cement Plants in Northern Region Yearly (000 tonnes)

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1 Associated (Wah) 900

2 D.G. Khan 1710

3 Cherat 720

4 Pioneer 660

5 Mustehkam 660

6 Fecto 600

7 Kohat 330

8 Gharibwal 540

9 Maple Leaf 1460

10 Dundot 480

11 Lucky Cement 1200

Sub-Total 7580

Cement Plants in Southern Region

12 Zeal Pak 880

13 Attock 660

14 Javedan 500

15 Pakland 540

16 Dadabhoy 450

17 Thatta 280

18 Associated (Rohri) 230

19 Essa 150

Sub Total 3690

Plant Expansion and New Cement Plants

Under construction

20 Saadi 960

21 Lucky 1200

22 Army welfare 660

23 Fauji 900

24 Chakwal 1650

Sub-Total 5370

Grand Total 16640

O v e r v ie w oft h e Industry

The cement industry of Pakistan entered the export markets a few years back,

and has established its reput ation as a good quality product. The latest

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information is that India will import more cement from Pakistan. So far 130,000

tones cement has been exported to the neighbouring country.

The last few years have been a golden period for cement manufacturers,

when the government increased spending on infrastructure development. High

commercial activity and rising demand for housing on account of higher per

capita income has kept cement off take growth in double digits.

During the financial year-07, cement sales registered a growth of 31 percent to

17.53 million tonnes as against 13.5 million tonnes sold last year. The cement sales

during July- February-08 showed an increase, both in domestic and regional

markets to 18.17 million tonnes. The domestic sales registered an increase of 7.2

percent to 14.4 million tonnes in the current period as compared to 13.5 million

tonnes last year whereas exports stood at

3.7 million tonnes as against 1.8 million tonnes in the corresponding period

last year, showing an increase of 110percent.

The cement sector is contributing Rs 30 billion to the national exchequer in the

form oftaxes. This sector has invested about Rs 100 billion in capacity

expansion over the last four years. There are four foreign companies, three

armed forces companies and 16 private companies listed in the stock exchanges.

The industry is divided into two broad regions, the northern region and the

southern region. The northern region has over 87 percent share in total cement

dispatches while the units based in the southern region contributes 13 percent

to the annual cement sales.

The cement demand grew 19 percent and 13 percent during FY05 and FY06

respectively. During the first nine months of FY07-08,production increased by 30

percent ascompared to last year. The demand for cement was forecasted to grow

by 26 percent during FY07 and 17 percent in FY08. The per capita consumpti on

of cement has risen from 117 kg in FY06 to 131 kg in FY07.

The main factors behind increase in demand of cement were: 60 percent higher

Public Sector Development Projects (PSDP) allocation, seven percent GDP

growth, increasing number of real estate development projects for

commercial and residential use, developing export market and expectedconstruction of mega dams. The operating capacity of cement in FY05 and

FY06 was 18 million and 21million tonnes, which rose to

37 million tonnes by the end ofFY07.

The cement manufacturers added eight million tonnes to the capacity and

the totalproduction was expected to be 45 million tonnes by the end of 2010. It

may result in a supply glut of 11 million, nine million and seven million tonnes19


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in 2008, 2009 and 2010 respectively. Despite an excess supply of 11 million tonnes

in 2008, it is estimated that the price would increase in domestic as well in

regional markets that may surely boost theprofitability and give relief to the

industry on its new investment.

As cement capacity is increasing to cater the rising domestic and regional

demand, it started facing a tougher time because of price fall after the firstquarter of FY06 due to increase in supply, energy prices started surging and

higher expansion led to mounting finance and depreciation costs. After reaching

Rs 430 per bag at the retail level earlier last year, cement prices fell sharply during

2007. Average cement prices were Rs 220 perbag as on April 27, 2008, as

compared to Rs 315 per bag in 2006.

However, the cost and exports may be affected due to weakness of the US dollar

causing coal, electricity charges and freight prices, comprising 65 to 70 percent

of the cost. The PSDP allocation has been cut by Rs 75 billion and feared

further cuts would curtail cement demand. Major capacities of countries likeIndia and Iran are expected to come online by FY10 and onwards which are

likely to convert these countries from dependent importers topotenti al exporters.

Moreover, this rising trend is expected to be short-lived due to higher interest

rates and inflationary concerns are likely to make it disadvantageous for

investors to enter the construction industry. In addition to this, to control real

estate prices the government is considering imposing a tax on it.

The export may reach to $ 500 million increase during 2008. Data for the first

quarter ofFY08 shows that Afghanistan is Pakistans largest cement export

market. The prospects for cement exports seem bright in the medium term due

to rising domestic as well as regional cement demand. Pakistan also achieved

improved access to India after the complete removal of the 12.5 percent

custom duty on Portland cement imports in this country from January 2007,

showing improved export opportunit ies for Pakistan. India is planning to import

more cement from Pakistan to stabilize prices in the market and the government

wants a balance in demand and supply of cement in the current fiscal year.

The import of cement from Pakistan has increased manifold during last fourmonths. India has registered a number of Pakistani cement manufacturer s, a

requirem ent to facilitate import of cement. Pakistan has already increased the

frequency of trains from one to three in a week to carry cement from Pakistan to

Wagah border. Due to boom in the construction industry, India needs cement in

bulk to meet its growing needs. The success of the sector depends on exports, its

profitability from depressed local prices and cost appreciation. The exports for

FY08 have already surpassed the last whole years export of 3.19 million tonnes

20


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Spring :09

and are likely to reach to 6.67 million tonnes in 2008.

The targets for exports for 2009 and 2010 are set to be 9.99 million and 10 million

tonnes respectively. Currentl y, the export demand is expected to be from new

inductee India along with other countries like Gulf Cooperation Council (GCC)

countries, due to rising oil prices-led economic growth. More countries like

South Africa to make the football stadiums for the World Cup and Sri Lanka

are also expected to approach Pakistani companies for cement imports.

However, export depends on factors such as: ability to produce cement at Rs 85

per bag. Export strategy should be made for at least three years,2008-10, after which new plant will start production in the region. In the

meantime industry should explore new markets for export or ready to lower

prices of cement in local market.

The sharp decline in cement prices were due to domestic competition among

producers has dampened the profitability of the industry. To cope with

this situation the manufacturers have strengthen cartel to set minimum cement prices. The example was marketing arrangement that increased cement prices to

the extent of 20 percent despite coal prices have gone down in the international

market to $124 from nearly $ 140 in November 2007 to January 2008.

To break-up cartel the Competition Commission of Pakistan raided the

offices ofAssociation of Cement Manufacturers of Pakistan and confiscated

computers and office record. The association condemned this action and said it is

against business norms. They said the commission is blaming cement

manufacturers for making a cartel for the last 10 years but could not able to

prove it. The capital structure of cement companies may change as most of theexpansions during last two to three years have been debt financed and companies

are expected to retire these debts rapidly during next three to five years.

Moreover, the slow down in economy may occur due to political uncert ainty

which might result in reducing cement demand in future. However, in case of

construction ofhydro-powered dams, there will be a sudden jump in the local

sales of those companies located near these dams.

The industry achieved an overall growth of 32% with domestic demand of

cement increased by 24.95% whereas the exports increased by 111.86%. The

overall growth achieved by many cement factories for the year under review was

111.29% consisting ofdomestic and export markets at 71.02% and 335.12%

respectively.

21


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Spring :09

Source: Pakistan Cement Overview of the Cement Industry Export ofCement

Pakistan Cement industry has been successful to capture export markets of variousGCC

and African countries which are new markets for the Country other

than the conventional export markets of Afghanistan and Iraq.C e m e n t I n d u s t ry P r e s e n t Scenario

1 .) Taxes

There is no concession on import of raw material or cementmanufacturing

Machinery.

22


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Spring :09

Excise Duty: Rs900 per tonne

Sales Tax @ 16%

2 .) Imports & Exports

Imports: Nil (Custom Duty @ 25%)

Exports: During FY08, after three slack years, the industry has started

picking up the pace. According to latest dispatches figures from APCMA,cement exports rose to 5.85 million tonnes during FY07-08 which is 84%

higher than the same period of previous year, contributed 3.18 million

tonnes in total 24.2 million tonnes dispatches.

3 .) Investments

Presently the cost of a new project is around Rs 7.5 billion (Chinese Plant

of3300 tonnes perday)

4 .) Capacity Uti liz ation

Overall capacity utilization of the industry has increased to 89% during

FY08, as compared to 80.54% in FY07.

5 .) Demand & Sales

In domestic market, the demand also increased substantially. During the

first ten months of 2007-08, cement sector achieved record sales. The sale

raised to 30.107 million tonnes against 24.22 million tonnes as compared

to the same period in

2006-07, an increase of 24%. During March 2008, the sales broke theprevious records and reached to 2.3 million tonnes. Moreover, a record

export of320,721 tonnes was also registered in the same month. Now the

total sales have reached to

30,107,273 tonnes in the period of FY08 which includes 22,381,563 localsales and

7,725,710 exportsales.

Findings & Discussions

Cement consumptionstrongly correlated with countrys core undamentals.

Cement consumption& GDP growth are strongly correlatedvariables all over the

world. Pakistan has also emerged as one of the developing nat io ns a ttaining

sustainable growthrates in the range of 5% - 8.5% since FY00. For FY09, we

expect the country to attain GDP growth of5%.

23


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Spring :09

Capacity Expansion the name of theGame.

There are 29 cement production units in the country. Up to Aug 2008, the total

installed cement product ion capacity is 37.156 million tones. Due to political

instability and lackof allocation of funds for public sector development program,

cement industry ofPakistan has come again in the recession phase which had

already registered an average growth rate of 2.96% for the period from 1990 to

2002. For the period from 2003 to 2007 cement industry of Pakistan had registered

an average growth rate of 20% and currently 24.6% growth observed during last

fiscal. The boost in cement sector is because of the rising construction activity

in the country, reconstruction activity in Afghanistan, new export avenues like

(India, development expenditure by the government.

24


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Spring :09

C e m en t I n d u s t r y - Porters Model

1 .) Entry Barrier:

Entry ba rr ie rs a re not too high in the industry. The technology can be easily

imported and setup. The government of Pakistan has also removed duty

from the capital investment and machinery costing over 5 million rupees. Theonly constraint is capital which can only be accessed by a bigplayer.

The key barriers would be :

1. Economies of scale, which would favor the bigger players, like Lucky

and DG Khan Cement.

2. Brands are not very critical, but still they play a small role in

consumerpreferences. Price is the biggest factor.

3. Cost advantage is critical. Companies lying in the South Zone Profile havea low

Cost and a competitive advantage. The major players like Lucky, Pakistan

Cement, Attock Cement seem to have a similar cost position. Lucky cement

is considered the best in the market.

2 .) Supplier Power:

Has a low impact. Mainly limited to coal / power (energy) wherein the

government pricing would have an impact. Pakistans Coal is not o f good

quality, s o the c o a l is imported and then used. The import price of coal also

depends upon the prices of fuel as they change monthby month. And it is easy to

supply coal in the south zone companies as compared to north.

3.) Buyer Power:

Very low to no impact. The prices are fixed and the massive constructionactivities in Pakistan was not able to tumble the prices.

4 .) Substi tute Product: Almost no

substitute product

5 .) Rivalry:

High rivalry in the industry as the industry is still fragmented. Top 4

companies have more than 50 % of the target market. However local players

can have an impact on pricing as cement as the industry depends on local

supply. Cement being bulky is generally not transported from long distance.

SWOT Analysis25


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Spring :09

Strengths:

1. During the last two years, the Public Sector Development Programme

has been considerably enhanced and this has coincided with greater

demand for cement from the private sector largely forconstruction

activities in the housing sector.

2. In last few years this sector has shown a constant growth of 16.6% fromyear 03-

06 and only in 2007 the rate of growth is32%.

3. Financial sector reform, increase in worker remit tance, higher

government infrastructure spending and fiscal incentive for the housing

sector will serve as catalyst for higher growth.

4. UNIDO, Chinese experts, and M/S Environmental Resources Management,U.S.A

is assisting the installation ofanti-pollution measures in the Cement

Industry.5. The capacity utilization for the sector also improved to 91.32 per cent from

89percent last year. Cement exports during the said period have

increased by 40 percent while the local cement dispatches have grown by

18 percent.

6. Pakistanis living in other different foreign countries want to invest themoney

they are sending as remittances, into safe and long-term investment

opportunities where real estate sector emerged as a prime choice of

asset class. The direct beneficiary of both these developments is cement

and hence become the Sector in Demand.7. Restructured debt situation, in a result of co-operation with US

government in different intern ational issues has given Government

of Pakistan (GoP), relaxation in investing more in development

expenditure.

8. The environmentally sound management of sewerage and solid waste is

a core issue in the National Conservation Strategy of Pakistan.

Consequently, National Environment Quality Standards have been

implemented for issues related to this sector. This has led to some concrete

measures; for example the waste problems ofcement factories are being

addressed by installing anti-pollution technology.

9. Export to Afghanistan currently growing at 39%, is a relatively andimportant

source of revenues for the industry. The strong demand for cement has

clearly affected the bottom line of all cement companies and

encouraged the major players to expand to meet future demand.

Weakness:

26


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Spring :09

1. Major regional cement producers and consumers- India, Iran and China

are also facing the demand-supply shortages and price hikes.

2. Iran has already placed a ban on cement exports whereas India (like

Pakistan) is also operating near full capacity.

3. There is non-cooperative gesture of the government.

4. Cement prices in the intern ational market are very tight, looking at the

prevailing demand.

5. The government has not taken any step for abolishing excise duty on

cement items, which is clearly negating of the achievement of lowering

prices forthe public and fordevelopment activities. The taxes still amount

to over Rs 70 perbag.

6. It is quite contrary to APCMAsrecommendations of allowing import of

cement up to 500,000 metric tons on concessional basis as a buffer stock.

The government has permitted unlimitedimports, which can provide

roots for damaging the domestic industry if neighbouring countries start

dumping the commodity into ourmarkets.

O pportunity:

1. According to the Medium Term Development Framework, the

government will gradually increase its allocation for the Public Sector

Development Program from Rs272b to Rs597b in FY'10, which is likely to

generate furtherdemand in coming years.

2. Pakistan has a potenti al to export around 10 million tons at present.

Localproduction potential is estimated at over 40 million tons per annum

over the next few years, there will be need to attract markets like UAE,

Afghanistan, Iraq etc.

3. It is expected that being the US ally, Pakistan would get most of the favor

in orderto keep its market share give the fact that all the constructi on

activities in Iraq and Afghanistan would be taken by US.

4. Pakistans per capita cement consumpt ion is amongst the lowest in the

region. The government has started massive spending on infrastructure

development- road construction and water management measures etc.,

which was the neglected area in late 1990s due to deteriorated balance of

payment conditions of the country. The country used to spend a major part

of the budget on debt servicing that left no room for developmentexpenditures. The situation has almost reversed now. The per capita

consumption is expected to increase phenomenally in coming years, as a

result.

5. Cement: The cement sector will have Rs 164 billion to build on. It will be

able to cash in on a slew of new development projects. Orders are expected

to pour in forthe 2,902 schemes connecting farms to market roads,

1,102 schemes for watersupply.

6. Aside from development projects the regularization program for Katchi27


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Spring :09

Abadis is also going to show up in cement profits.

7. Cement industry sources say that even a 20 percent to 25 percent

switchoverfrom brick to cement blocks could lead to an increase in the

sectors capacity utilizationby severalpercent age points.

8. Presently some of the cement companies from Pakistan are exporting

cement to Afghanistan, Iraq and UAE only to maintain their presence in

these markers. Aftercompletion of major expansion plans in Pakistan in2007, there would be surplus to export in these markets however in the

same period Iran would also be able to approach vigorously these markets

as its most of cement plant will start to come online.

Threats:

a) Key Trigger:

Re formation of cement cartel

Exceptional demand growth ensuring from higher governmentspending pre- elections. Better than expected 3QFY07 results Beginning ofIndia/Pakistan trade via Wagah border Ban on Indian exportsb) Key Risks:

Following can be potential triggers and threats for future upgrade or downgradefor the

Cement industry

Political instability post 2007 elections

Delay in construction of Bhasha dam and Munda dam

More aggressive price controls measured by the government

Re-emergence of price war

28


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Spring :09

Local Demand Drivers

Pakistans domestic cement consumption is driven by two vital factors. 1) housing

needs arising from Pakistans burgeoning 1.5% Y-O-Y population growth,

2) federal governments increased disbursements against apportioned Public

sector development program (PSDP) since FY04.

1) Housing Growth to Spur Consumption:

According to public sector based House Building Finance Corporation HBFC)

figures, an average population per housing units in Pakistan isapproximately 8

people perhousing unit as compared to global average standard of around 6

persons per housing unit.

In order to meet global standard, the units required for the population of 160

million Pakistanis should be 26.7 million as compared to current housing units of20 million. We see an increase in per capita income that will accentuate

construction of at least 6 million

7 million homes. This aspect is facilitated by banking sectorsrenewed mortgage

finance business. At present this business is merely less than 1% of GDP in

Pakistan (total size ofmortgage liabilities is nearly Rs 55 billion) as against 3% -

4% in neighbouring India. Banking industry is bracing for a target of at least

Rs 300 billion till FY10-11 in the guidance of State Bank of Pakistan and

multilateral International Finance Corporation (IFC).

2) PSDP allocation & disbursement key to cement consumption

Acts PSDP program accounts to nearly 35% of the total domestic cement

consumption. Governments increased focus towards infrastructure development

in the country overthe last few years has also given impetus to our assertion. It

has been a driver ofcement consumption in recent years with FY08 PSDP budget

allocation of Rs 520 billion (5.7% ofGDP) enunciating a Y-O-Y (Year to Year)

growth of25%.

Going forward we have assumed 10% growth under PSDP allocations, which is

expected to spur 45% growth in cement consumpti on during FY09. However, riskto our assertion is lasting political stability in the country at the aftermath of 2008

elections.

M

29


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Spring :09

700 30.00

600 25.00

500

400

300

200

100

20.00

15.00

10.00

5.00

30


31/44

Burden on Cement Sector

Presently, the cement industry of Pakistan is heavily burdened due to levy of

Federal Excise Duty which is Rs. 900 per tonne and GST 16% on duty paid price.

In addition to Federal Excise Duty and General Sales Tax, cement industry is also

paying theprovincial levies (Royalties and Excise Duties) on acquiring of raw

material forproduction ofcement i.e. lime stone and shall clay. Per tonne cost

impact of these taxes in four provinces ofPakistan is as follows:

Per Ton Cost Punjab NWFP Sindh Balouchistan

Lime Stone 25 23 20 65

Shall/Clay 3 4 3 11

Source:APCMA

If we compare our taxation and retail prices with other regional countries

revealed that taxation in Pakistan is been highest while cement retail prices were

remain lowest. But now the scenario has changed, local manufacturers are

continuously trying to capture intern ational market because their cost of

production has amplified with respect to

increase in prices ofimported coal and devaluated localcurrency.


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C o n t rov e r si a l Issues

One of the major issues lurking in the market that cement prices are rocketing day

by day and after two or three days 50kg bag of cement makes new high. Yes! It

is true Cement prices making new highs but the situation are created by our

own cement dealers. One lame excuse is expressed by every cement manufacturerthat the coal prices has burdened their cost ofproduction and government has

levied with different taxes and Ex-factory price of a 50kg bag has reached to

Rs335 but the selling price of the commodity in the retail market is Rs400 this

situation is created by the name of demand and supply.

According to local cement manufacturer, Sufficient amount of cement is

produced by the manufacturers but local companies due to high leverage

amounts try to sell their product at high prices to strengthen their financial

statements that is why they are focusing export regions. But the negative

activities of dealers create panic in the market, in other words sell the

commodity with out paying taxes or in a black market this is anotherreason of

cement shortage in the city.

1.) Hike in Prices is

Fake

The existing hike in the cement price as totally unrealistic if we go just two months

backcement bag priced at Rs200 to 220 in February 2008 which has gone up

to Rs380 to Rs400. This surge in prices is not only artificial but dishonest and

illegal and as a result will have a negative impact on the countrys overalleconomy; clear reason of an increase in cement price is its unrestricted export.

Almost all the cement manufacturers are exporting theirproduction and

ignoring the countrysrequirements.

The cement supply to local market is almost negligible as a result of which the

market is faced with the severe scarcity. The cement industry has to give

first preference to Pakistan as per government policy. Most of the cement

companies has obtained loans amounting to billions of rupees and established

cement units with preference to meet local needs, but this great objective was

pushed behind in the greed for higherprofits.

In the Budget 2008-09, government risen GST from 15 to 16 per cent and FED

from Rs750 to Rs900 per ton and this should have a price difference of mere Rs10

to 15 perbag but during the last 45 days Rs100 has been increased which is totally

unjustified.

2.) Capacity Uti lization


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Low capacity utilization after expansion led to the breakdown ofmarketing

arrangement increasing the share of larger players in the market and drop in

cement prices. Afterexpansions in FY08, top three cement producers namely

Lucky, D.G. Khan and Pioneerwould be able to fulfil about 40% of local

demand. These companies will be better positioned to negotiate their

respective quotas in the arrangement and walk off with higher allocations. The

smaller players are likely to benefit from the recovery in prices after revival ofthe marketing arrangement.

3.) Pakistan per CapitaConsumption

Pakistan has currently per capita consumption of 135kg of cement which is

comparable to that for India at 150kg per capita which is one third of China but

substantially below the World Average of 300kg and the regional average of over

400kg for peer in Asia and over

600kg in the MiddleEast.

4.) Ranking of Pakistan Cement Sector not

defined

Pakistani Cement Sector is still not in the world ranking because of less per

production capacity and its utilization. Currently there are 29 cement units are

working which are producing 37.15 million tonne per annum. But our

neighbouring countries China and India are on the 1st and 2nd rank with 869

million tonnes and 165 million tonnes perannum in Asia.


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Geographical Distribution of Pakistan

Profiles

1.) North Zone Profile

In our northern region 19 units are engaged in producing marketing and selling

cement and clinker nation wide and abroad. DG Khan Cement, Lucky

Cement Company, Bestway Cement, Maple leaf Cement and Pakistan Cement

remain the major players in terms of sales dispatches from the north zone,

these players have contributed approximately 56% of the total region and

44% is contri buted by other small manufacturers.

FY08 Mark et Share(North)

Others

46%

DGKC

18

% LU

CKY

12%

FCCL

5%

PIOC

7%

M LCF12%


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1.1.) Half Year Erformance

During the period the performance of companies lying in the region

sold 11.3 million tonnes of cement in 6 months period of FY08, which is 31%

higher than 8.6 million tonnes sold in first half of FY07. Export sales jumped

by 165% to 1.96 million tonnes in first half FY08 as compared to 0.7 milliontonnes in the same period last year. Local sales are not much satisfactory as

compare to consecutive period last year only 18% to 9.4 million tonnes upsurge

recorded in the period. Major portion of export sales is contributedby

1.) Pakistan Cement which is 15.9% to 311,302 tonnes of the total export sales

2.) Lucky Cement 13% (254,841 tonnes),

3.) Askari & DG Khan Cement by 11.1% (217,113 & 217,313 tonnes),

4.) Bestway Cement by 10.7% (209,233 tonnes),

5.) Cherat Cement by 9.6% (187,323 tonnes)

6.) Remaining 28.76% is contributed by other companies respectively.

On the ground of localsales

1.) DG Khan Cement is a major contributor which has contributedapproximately18% (1,694,465 tonnes) in total sales.

2.) Lucky Cement 13% (1,256,200 tonnes),

3.) Kohinoor Maple Leaf Cement by 11% (1,046,560 tonnes),

4.) Pakistan cement and Bestway Cement by 10% (904,563 & 923,357 tonnes)

5.) Remaining 38% contributed by other companies respectively.

1.2.) Annual

Performance

As compare to first half yearly performance, second half remain quiet satisfactory

with respect to sales volume. During 1st half 9.46 million tonnes of cement sold as

compare to 9.66 million tonnes in the 2nd half of FY08. As far as export sales are

concerned total 3.15 million tonnes sold abroad as compare to 1.97 million tonnes

sold in the first six months of FY08 which is 59% higher than the first half. If

we compare Y-O-Y 24.25 million tonnes cement sold from the region against

19.4 million tonnes sold during same period last year.

DG khan Cement and Lucky Cement remain with the highest dispatcheswith 14.4% to (4.238 million tonnes) and 10.3% to (3.09 million tonnes)respectively.

Other than the key players Askari Cement, Bestway Cement, PakistanCement and Pioneer Cement contributed with 8.8 million tonnes which isapproximately 29.4% of the total north region sales.

2.) South Zone


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Profile

In south zone currently 10 plants are in operation and producing 7,689,500

tonnes ofcement per year. In the region Lucky Cement sharing 31%to 2,400,000

tonnes of the total followed by Attock Cement Pakistan Ltd. which is sharing

23% of the total capacity ofcement produced in the zone.

Javedan

6%

Dewan

14%

Others

14%

F Y 0 8Mar

k e tShare

(South)

LUCKY

42%


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2.1.) Half Yearly Performance

During the period of 6 months Lucky Cement lead the zone and contributed 89%

in the total export sales and sold 904,395 tonnes of cement which is 191% higher

than sales recorded in period of 6 months FY07. The major portion of export

consignment way towards India as lucky cement uses the sea routes to export in a

bulk.

As far as local sales are concerned total local sales done through the zone is decline

by 8% to 1.47 million tonnes in first half of FY08 as compare to 1.59 million

tonnes in the same period last year. During the period Attock Cement Pakistan

limited sold 543,203 tonnes of cement which is approximately 37% of the total

local south zone sales followed by Dewan Cement by 23% to 335,200 tonnes and

Lucky Cement by 14% to 211,660 tonnes respectively.

2.2.) Annual

Performance:The performance of companies laid in the south zone remain extraordinary,

total 5.85 million tonnes cement sold during FY08 which is 22% higher than the

dispatches made during FY07. Lucky Cement linger as a higher cement seller

of the region with 2.5 million tonnes which is 42% of the total south zone

sales followed by Attock Cement with 1.36 million tonnes and Dewan Cement

with 0.77 million tonnes. From this region one thing to be highlighted most, that

the companies took maximum benefits of sea port

and exported bulk of cement from the site. Lucky Cement exported 2.11 milliontonnes from its Karachi plant which is specifically installed for the purpose of

export sales and Attock Cement has also taken the samebenefit.


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Issues of the Year

Price Vs. CoalStory

During the period FY07-08 cement sector of Pakistan remain under pressurebecause of139% sharp surge in the international coal prices Y-O-Y. Coal

contributes approx. 55% to 60% in the manufacturing of cement. It must be keptunder view that Pakistan use to import cement from South Africa and otherAfrican countries which has crossed US$ 160 per tonne and due to devaluatedlocal currency we have to pay 13% above than the cost. Due to continuousincrease in the prices of coal, retent ion price of cement perbag affected 40%to 45% and the profit margins of the cement manufacturers on averagedropped by 30%. But cement manufactures has found an alternate of getting theirprofits back from the market i.e. export of cement. Year FY07-08 remain verysuccessful for the cement manufacturers as they started focusing in theinternational market, improve theirquality and get the licenses of exporting fromIndia, Dubai, Qatar, Afghanistan, Sri Lanka, Indonesia and now from Bahrain.

Another major hurt that is embossed by the local government is the increasein CED (Central Excise Duty) from Rs750 to Rs900 which is later stamped onlocal consumer by increasing the price of a 50kg from Rs290 to Rs305. Price of50kg bag was already grew by 29% Y-o-Y from Rs225 to Rs285 because ofcontinues increase in fuel prices and now cement is available at a price of Rs400at retail level.Source: Independent Research


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Companies listed on the KSECompanies listed on the KSE

Pakistan Cement Sector, a money-spinning investment opportunity. Cement sector is one

of the most promising sectors at the Karachi Stock Exchange. It comprises of 23 listed

companies:

Cement Companies Listed on the KSE

Symbols Companies Symbols Companies

AACIL Al-Abbas Cement JVDC Javedan Cement

ACPL Attock Cement KOHC Kohat Cement

BWCL Bestway Cement LUCK Lucky Cement

CHCC Cherat Cement MLCF Maple Leaf Cement

DBCI Dadabhoy Cement MLCFPS Maple Leaf (Pref)

DCL Dewan Cement MUCL Mustehkam Cement

DGKC D.G.K. Cement PCCL Pakistan Cement

DNCC Dandot Cement PIOC Pioneer Cement

FCCL Fauji Cement PIOCR Pioneer Cement (R)

FECTC Fecto Cement PKSLC Pak.Slag Cement

FLYNG Flying Cement ZELP Zeal Pak. Cement

GWLC Gharibwal Cement


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Ten of these cement companies are currently included in the KSE-100 index based on their

good business performance.

Cement Companies in KSE-100 Index

Symbols Companies Symbols Companies

ACPL Attock Cement PCCL Pakistan Cement

LUCK Lucky Cement PIOC Pioneer Cement

MLCF Maple Leaf Cement BWCL Bestway Cement

DGKC D.G.Khan Cement CHCC Cherat Cement

FCCL Fauji Cement JVDC Javedan Cement

Common Pakistani investors tend to have more inclination towards investing in real estate

rather than in the bonds, stocks and banking products. The country is also going through a

developing stage and numerous public and private construction projects are in the pipeline.

Products of cement sector are always in high demand all over the country, which in turn

strengthens the position of the cement sector at the stock exchange markets. The demand

for cement products transformed into a demand boom with the commencement of

reconstruction activities on a huge scale, after the disastrous earthquake destroyed

hundreds of towns and cities in the northern areas of Pakistan.

Moreover, high demand and low supply of cement in South East Asia is also setting the

equilibrium price at a high level. Pakistan cement sector has been cashing in this situation

quite successfully by winning big export deals to meet huge demands of cement in

Afghanistan, Central Asian countries, Saudi Arabia, Gulf, Iraq and India. As a result, the

cement exports have become more than double by moving from 64.36 million dollars to

135.67 million dollars during the first six months of the FY 2008.

Cement sector has been the most attractive investment opportunity in Pakistan for the

foreign investors. It drew above 80 million dollars foreign investment during the first six

months of the current fiscal year. Last year, this amount was only 11.9 million dollars

during the same period. It implies that the local cement sector has seen a tremendous


41/44

increase of 577% in the foreign investment during the first half of FY 2008. This enormous

leap is mainly due to increased international demand, but can also be attributed to

improved infrastructure, availability of raw material and cheap labor. Foreign investors put

in their money in order to enhance the production capacity of the companies to meet the

growing demand, as most of the cement manufacturing companies have reached the limit

of maximum capacity utilization in cement production. According to industry sources and

financial analysts, huge increase in the profits of cement sector is expected in the FY 2008.

This sector is showing rapid growth and the earnings are anticipated to go up by 89-90

percent in second quarter of FY 2008.

Cement producing companies have increased the price per bag from Rs. 185 ($3 approx.)

to Rs.220 ($3.5 approx.) recently. This step has improved the earnings of the companies.

Analysts are expecting an annual growth of 22% in the profitability of the cement sector

till 2013. Pakistani stock market has been on the bull-run for the past six years with an

average gain of 47.5%. In spite of the fact that the country was in a state of chaos and faced

havocs one after another during the year 2007, the stock exchange has made remarkable

progress by gaining 40.

It reached its all time high when it closed at 14,815 points on December 26, 2007. Most

interestingly, cement sector outperformed all other sectors at KSE during the year 2007. It

was undoubtedly the most profitable sector at KSE with 47% annual capital return.

Another plus point that predicts a vivid future for the Pakistani cement sector is the fact

that the country is affluent with the raw material needed by the cement manufacturing

companies. With improved infrastructure, it is going to be easier for the companies to take

advantage of the abundant deposits of raw material.

Future OutlookFuture Outlook

At the current point cement manufacturers and the government have to take concrete steps

even to keep units in production. On the inputs side, necessary steps are required to contain


42/44

the increasing energy cost. The government must also look into the case of providing

subsidy on freight to the exporters of clinker and cement. The prescription is to optimize

capacity utilization.

According to analysts the future of cement exports depends on two factors: surge in cement

prices in the export markets and the government of Pakistan subsidizing freight charges.

While the quantity of exportable cement in the region would gradually decline and prices

are expected to increase, it will take time to get a favorable decision from the government

to provide subsidy even on freight cost. But absence of bulk cement handling facilities will

remain a major deterrent.

Lucky cement which completed its construction at a fantastic speed to qualify for duty

exemptions has met the fate apprehended by the industry experts. Due to various technical

problems including sinking of some foundations, the management was forced to close

down the production soon after starting commercial production. It is feared that it would

not be able to resume production till the first quarter of the next calendar year.

But prospects of recovery of cement industry have been further reduced due to another

recent increase POL prices. Electricity tariff is also expected to be revised upward shortly.

The advantage of devaluation has been eroded almost completely due to increase in energy

cost.


43/44

Installed Capacity

Cement Plants in Northern Region (000 tonnes) per annum

1) Associated (Wah) 9002) D.G. Khan 1,7103) Cherat 720

4) Pioneer 6605) Mustehkam 6606) Fecto 6007) Kohat 3308) Gharibwal 5409) Maple Leaf 1,46010) Dundot 48011) Lucky Cement 1,200Sub-Total 7,580Cement Plants in Southern Region

12) Zeal Pak 880

13) Attock 66014) Javedan 50015) Pakland 54016) Dadabhoy 45017) Thatta 28018) Associated (Rohri) 23019) Essa 150Sub Total 3,690Cement Plants under Construction

20) Saadi 96021) Lucky 1200

22) Army welfare 66023) Fauji 90024) Chakwal 1,650Sub-Total 5,370

Grand Total 16,640


44/44

Bibliography:

Business Recorderwww.brecorder.com

Dawn Newspaper w w w.dawn.com

APCMA. All Pakistan Cement Manufacturers Association http://apcma.com

Research Firms

o Invisor

Securitiesb. DCR

o Jahangir Siddiqui

Scribd w w w.scribd.com

The Economist Intelligence Unit. Country Report Pakistanw w w.economist.com

Lucky Cement Annual Report 2008 http://www.lucky-

cement.com/Financialreport%20pdf/01%202007%20to%20June%2030%202008/A

n nual %20Account%202 008 .pdf

Jang Newspaper w w w.jang.com.pk

State Bank of Pakistan w w w.sbp.gov.pk

DG Khan Cement

http://www.dgcement.com/financial-

reports/AnnualReport2007 -08 .pdf

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