Cement Industry of Pakistan

Significance:

— Currently there are 29 Cement Plants with installed capacity of around 35 mn tonnes p.a.
— It has an oligopolistic structure with more than 50% of the shares with top 5 companies
— Contributes over Rs.30billion in the form of taxes.
— Foreign Direct investment inflow up to $ 80.4 million by this sector.
— The per capita consumption of cement in 2003 was 75kg which increased briskly to 110kg in 2007

Factor Conditions:

Capital Resources
— Very huge investment in the cement industry is made $26.2 million in this current year up till the month of february and $80 million in the year 2007-08
— Duty of almost 40% is imposed in the industry which is 186% higher than India therefore the price of cement bag is Rs. 220 per 50 kg. in Pakistan
— Cement industry stays at a capacity utilization level of 65 - 70%
— Reasons:
— Need to overall the lines
— In winter and rainy seasons cement usage decreases

Infrastructure
— There are 27 individual firms in the market out of which 21 are listed in stock exchange 4 are foreign companies and 3 belong to armed forces
— Prices of cement does not vary too much due to geographical location however it effects very little price changes due to 20% freight cost in the total cost of cement manufacturing.

Material Resource
— Raw materials:
¡ Limestone (75-80%)
¡ Clay (15-20%)
¡ Iron ore (little amount)
¡ Gypsum (5%)
— Machinery Imported from:
¡ China
¡ Italy
— Sufficient enough to meet European Standards
Labour
— Skilled, Unskilled ratio is 2:3 as determined by the research
— Skilled labour mostly include Chemical Engineers mostly from NED and NUST

Energy Sources
— 60-70% cost of production includes the cost of Energy sources.
— Coal and Gas are used as a source of Energy however Petroleum can also be used as alternative.
— Gas obtained from gas lines and Coal is mostly imported from China
— Furnace oil/coal/natural gas:
— Major portion of cost of sales
— Electricity is the most expensive out of the three while gas is the cheapest
— Coal is used however because the pressure required for using gas to heat the kiln is not adequate

Capacity Utilization
· The capacity of cement production is 37 million tonnes last fiscal year
· Current capacity utilization is 70 – 75%.
· Reasons
o Machine repairing
o Seasonal demand

Transportation
— Containers are used for transportation purposes and even trains when cement is required urgently from north to south or vice versa
— As for exports ships are launched from ports but the cost of transportation faced by firms is so high that at maximum they can reach till South Africa for exports and the price gets out of budget when the ship reaches USA
— ISSUES
◦ Though constant training is done, still labor is inefficient
◦ Freight charges are very high hence Pakistan unable to sell cement to USA
Packaging:
— Packaging is a very important factor for cement to remain of good quality with time
— Shelf life of cement is 3 to 6 months and after that the quality of cement seldom decreases by 5%
— The storage house of cement should be such that it should be protected from air which might make cement thick and moisture should be avoided so that cement is not spoiled
— 2 ply packaging is most common to be found and further on the packaging is used for paper bags after cement has been used from the packet
— Polypropylene bags are also developed for Cement packaging purposes

Demand Conditions:

Seasonal Demand
— Demand of cement decreases during winter season because days get shorter and lesser work can be done during working hours
— In winter season, working conditions are not appropriate for labors as cement causes damage to their hands while working in wintery conditions
— The situation is vice versa during summers

Housing Sector
— Housing sector is one of the major drivers of growth for the cement industry, it consume roughly 40% of cement demand
— Banks have lent up to PKR 55bn to the private sector for the purpose of buying/building houses
— An investment of PKR 950bn (USD 16bn) is envisaged in the Medium Term Development Framework (MTDF) for the development of housing during FY05-10
— ISSUE
◦ The recession which has just come in has affected the demand and sales have reduced throughout the industry.

Government Development Expenditures
— Dams, Roads, Tunnels, Bridges, Underpasses
Dams:
— The impact is not as big as the chain effect of PSDP and housing sector, it is still significant
— Pakistan has sought USD 17bn funding from international lenders for the construction of three dams by 2016 which will be needed to avert flood, drought and energy crisis
— Construction of four large dams will generate demand of 3.7mn tons. Bhasha Daimer Dam, Munda Dam, Akhori Dam and Neelum Jhelum
— ISSUES
◦ Impact of these dams is very little
◦ Plans of building dams come in conflict with changes in governments

Exports
— Business Recorder reported that Pakistan’s cement exports witnessed a healthy growth of 65%, to over 6 million tons during 7 months of the current fiscal year mainly due to rise in international demand
— The statistics of All Pakistan Cement Manufacturers Association also showed that cement exports had mounted to over 6 million tons in 7 months as compared to 3.62 million tons of same period of last fiscal year, depicting an increase of 2.38 million tons
— ISSUES
— Tough competition faced from china
— Plants of India will be active in three to four years
— Reduced demand for cement due to recession specially in Dubai real estate

Recent Demand Issues
— Decline of local demand
— Reduction in public and private investment in construction and development projects
— Price war in both domestic and export markets and jeopardise some manufacturers’ viability
— Many issues have come into play due global recession

Related and Supporting Industries:

Fuel Supply
· Natural Gas- Sui Gas company

Construction
— Housing development
— Industrial development
— Commercial development
— Government projects

Mining and Quarrying
— The country has immense reserves of various minerals and natural resources.
— Pakistan produces 6.81 million tones of limestone and 955000 tones of Iron ore.
— Balochistan province is a mineral rich area having substantial mineral, oil and gas reserves which have not been exploited to their full capacity or fully explored

Transportation and Logistics
— 20% of total cement cost is that of transportation on average
— Bulkers are used in order to transport loose cement from plant to the port
— Ordinary trucking system is used to transport raw material to the factory site and the packed cement to local consumers.
— Shipping lines been used to ease the export of cement

Firm strategy, structure and rivalry:

Structure
— APCMA is the apex body of the cement manufacturers of Pakistan. It is registered body under section 3 of the Trade Organization Ordinance 2007 wide license no 14, dated April 26, 2008 issued by Ministry of Commence. It was incorporated on14th of September 1992 under section 32 of the Companies Ordinance 1984.
· There are five dominant industries of Pakistan, on the basis of their production capacity. The market share of these firms is as follows:
§ Askari cement (NZP) 7.6%
§ DG cement 9.8%
§ Lucky cement 12.7%
§ Maple leaf 7.1%
§ Pioneer cement 5.5%

Strategy
— Cost-cutting strategy is followed by almost all cement manufacturers. Though, some large manufacturers like Lucky Cement also follow the differentiation strategy, but only to some extent
— Unstructured working style
— Firms are not unanimous in following a single strategy by which they all could benefit in the local and especially the international market
— Lack of knowledge on part of the owners exporting to international markets
— Unaware and divided on their opinions of which strategy to follow

Rivalry:
— Rivalry exists on the basis of increased productivity and innovation.
— Barriers to entry.
— Being dominated by large players only.
— 20 out of 27 plants are operational.
— Plants in the North and South.
— Export of cement
— Role of Cartels
Issues
— Formation of cartels becomes a problem for small manufacturers as they are left alone in the market and their due share in the market is not respected.
— Not much of innovation is possible in this industry. Intense rivalry can make it difficult for smaller firms to survive.
— Cannot compromise much on the prices. Hardly possible for anyone to get an edge due to price.
— In order to compete and survive in the market, the firms may also reduce their quality.

Recommendations:

Factor Conditions:
— Coal fired power plants can be imported from China to produce electricity that can be run on the local low quality coal.
— GOP should provide subsidies to the cement industry for the purchase of electricity from the local producers.
— GOP should provide infrastructure to the cement industry to setup new factories
— Measures should be taken to insure that the customers are not exploited by the cement industry.
— Proper workshops that are held under the supervision of experts so that the practical knowledge is properly imparted to the labor.
— The cement industry can use reward and bonuses to increase the motivational and performance level of the labor force.
— Foreign and local experts should be hired to do the research and development.
— Plants that have completed their working life should be phased out and new plants should be imported or setup up locally.
— GOP should provide incentives to the cement industry so that they can import new plants.
— European and South American markets should be targeted.
— Measures should be taken to provide dedicated gas supply to the cement industry.

Demand Conditions:
— GoP should stress on factors that increase the GDP as the cement industry is closely correlated to GDP
— The construction programs undertaken by the previous government should not be abandoned.
— Before the activation of the Indian Cement plants Pakistani cement industry should exploit the situation to its benefit.
— GOP should stop the further curtailing of PSDP
— GOP should do its upmost to control the instability in the country.

Related Industry:
— Cement industry, rice industry and sugarcane industry should work together to bring about innovation in using the byproduct of the rice and sugarcane industry to find efficient and cost effective fuel alternatives.
— Cement industry can enter in to contracts with international logistics transportation companies such as Mersk to export cement to USA in huge volumes at low cost
— Better cement storage facilities should be made and air and moisture proof bag should be made to increase the shelf life of cement.
— Cement industry should enter into long term contracts with cement transporters to gain discounts and seek reduced transport prices.

Firm Rivalry, Structure and Strategy:
— When the big companies are forming quantity based cartels, small manufactures should be also considered as otherwise they would go out of business.
— Better machinery and management should be used to become cost efficient and become competitive.
— Should not compromise on the low quality raw material, and should charge higher prices for higher quality products and improve brand image.