cementing growth – prospects for pakistan's cement industry

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5/14/2016 Cem enting growth – Pr ospects for Pakistan' s cement industry

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Feb 27, 2016 #1

Cementing growth – Prospects for

Pakistan's cement industry

.................................

Cementing growth – Pr ospects for

Pakistan's cement industry

For Pakistan's cement industry's growth, much will depend on how the

economy performs and the government responds.

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Illustration by Creative

Unit.

The year 2015 was a busy one for Pakistan’s cement industry. Not onlydid local demand for cement increase by 12% in one year, but four

cement companies (Attock, Cherat, DG Cement and Lucky Cement)

announced their intention to increase production capacity. When these

plans reach fruition (probably in the next year or so), they will effectively

increase the overall production of cement by 7.7 million tons – from the

current 45 million tons to 53 million tons per annum.

The increase in demand and planned increase in production capacity

have many implications for the industry; however, to understand them

fully, it is essential to step back and examine the dynamics of this sector.

Despite having an extremely well developed cement industry, Pakistan’s

per capita cement consumption which stands at 140 kgs, is the lowest in

the world – the global average is 400 kgs per capita. Poor economic

growth, lack of government interest in infrastructure projects and high

real estate and housing prices have kept local cement demand fairly low

and for many years, cement manufacturers, especially those based in

the south region (Sindh and Balochistan), have focused mainly on


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exports. Manufacturers whose production facilities are in the north (KPK

and Punjab) have shied away from exports due to prohibitively high

costs of inland transportation.

However, in the last six years, the export market has shrunk, so that

whereas the industry exported about 10.98 million tons (26% of its total

production capacity) in 2008, the first five months of FY 2015-16 saw

this number drop to 2.56 million tons (a mere five percent of totalproduction capacity). This reduction in exports was due to two major

factors. One, prohibitively high sales tax and excise duties (both federal

and provincial) make the price of Pakistani cement uncompetitive in the

international market and two, the drying up of traditionally thriving export

markets such as the UAE and South Africa which have now built up

their own cement production capacities and no longer require cement

from Pakistan. In fact, South African manufacturers recently went to the

extent of persuading their government to impose anti-dumping duties on

Pakistani companies such as Attock, Bestway, DG, and Lucky in order

to protect their own interests.

The impact of lower exports has been especially significant on

companies such as Lucky Cement, which over the years has invested in

developing their own terminal at Karachi port as well as an in-house

export fleet. Amin Ganny, COO, Lucky Cement, puts a statistical value

on this saying that “whereas the company used to do 40% local sales

and 60% exports in 2008, today we export about 25% of our production

whereas rest of the cement we produce is sold locally.”

With the prices of coal (the fuel used in cement production) in decline from $140

per ton to $70 and now to $52 per ton, the cost of producing cement is lower and

this makes most cement manufacturers optimistic about the future, although

they are adamant that the government must reduce sales tax and excise duties

to make the product even more cost effective.

It is therefore just as well that although exports have dwindled, there has

been an upsurge in local demand. The announcement of the China-

Pakistan Economic Corridor (CPEC), a $46 billion mega project, which

will include infrastructure development projects across Pakistan and the

lowering of real estate prices – which has led to the initiation of severalnew housing projects - are the two major reasons for increased local

demand.

Mohammad Fazlullah Shariff, CE, Thatta Cement, says that about 60%

of the cement produced in Pakistan at present is used in infrastructure

projects, and the housing sector accounts for the remaining 40%.

However, Syed Muhammad Anwar, CEO, Dewan Cement, is of the

opinion that the reverse is true.


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“Real estate and builders are consuming 70% of cement while 30% is

used in infrastructure.”

Irfan Sheikh, Director Finance and CFO, Bestway Cement, tends to

agree with Anwar and says that the lion’s share of business is coming

from the housing sector. This makes sense considering that according to

news reports from May 2015 (Source: The News), Pakistan faces ahousing backlog of nine million units, particularly for poor and

disadvantaged people and the government has announced several

plans to address this shortfall.

This combination of increased demand from housing and infrastructure

has in a way forced cement manufacturers to shift their focus to the local

market. Some, like Lucky Cement, initiated mass media advertising

campaigns in 2012 to build up their brand image – not only with

contractors and builders who are generally the decision makers when it

comes to choosing a brand of cement, but also with customers buildingtheir own homes. Others, like Bestway (which is also advertising now),

have introduced new products, such as bonding agents and tile grout in

addition to their existing cement product lines to establish a USP of sorts

for themselves.

Establishing a USP is not something that cement manufacturers have

paid much attention to in the past, and many still think of cement as a

commodity rather than a product with marketing potential, and Sheikh

strongly believes that because cement has been selling by itself,


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companies have simply not bothered with marketing.

However, considering that cement prices are not fixed (they vary

according to quality and consumer perception), local demand is going to

dominate in the future and there will be increased competition due to an

increase in production capacity, there is now certainly room for

companies to market themselves, regardless of whether they choose to

go for a B2B approach or target end consumers directly.

One way of targeting end consumers directly could be through bringing

about a change in the SKUs. At present, the cement industry offers

loose cement for major builders and contractors, but the only SKU

available to small time consumers of cement (i.e. those using it to build

personal homes or for DIY projects) is the 50 kg bag. Although smaller

sized SKUs such as 25 kg and 10 kg are available in international

markets, local cement manufacturers have not ventured in that direction

so far. A reason why, says Sheikh is the cost of the packaging which is

made from imported kraft paper and costs about Rs 20 per bag for 50kg of cement.

“If you reduce the packaging size to say 25 kg, it would not automatically

reduce your packaging cost by 50%; it may only reduce it by two to three

rupees, and therefore on a per kg basis, it may become more expensive

to package smaller quantities.”

Another reason why companies have not worked on new SKUs is due

to the fact that it would require a large capital investment to acquirepacking machines for new sizes. However, as the Pakistani market

develops, this may become a viable and necessary investment.

Marketing, whether in the form of varying SKUs or by investing in

advertising, might also become essential in the future, because despite

increased demand and the significant potential for growth, the industry

still faces major challenges. Firstly, the import of cement from China and

Iran through official and unofficial channels poses challenges for local


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producers and although the government has imposed a 20% import duty

on Iranian cement, there is still a great deal of supply. Secondly,

Pakistani cement manufacturers still have a surplus capacity of nine

million tons (mainly due to the fact the exports are down) that still needs

to be absorbed in the local market

........

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cementing growth – prospects for pakistan's cement industry

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