Cement industry of pakistan

CEMENTINDUSTRY KHUSHBAKHT SUHAIL WARDA HASSAN SAAD MASOOD AIZAZ HAQ FEHAM ALI

FROM THEN TO NOW… • 4 cement factories - Capacity of 0.5 Mln tons 1947 • 14 Cement plants – 2.5 Mln tons • The industry was nationalized 1972 • The State Cement Corporation of Pakistan (SCCP) was established • Cement industry was deregulated (with establishment of 7 plants) • GDP growth rate of 6.5%, high imports of cement1985-86 • Process of privatization occurred in 1991 • Increased production capacity from 16 Mln tons in 20002000-10 to 44 Mln tons in 2010

SIGNIFICANCE OF INDUSTRY• Direct and Indirect Taxes – Rs 30.0 Million• Employment (Direct and Indirect) – 150,000 (Approx.)• 5th Largest exporter of the world• Cement exports ranked 10th in the major export list of Pakistan• Major Export Markets – Afghanstan – India – African Countries – Middle Eastern Countries – Iraq

Year Per Capita Consumption2003 75 kg2007 110 kg2011 145 kgWorld average = 270 kg

Growth Rate 20% 2.96%1990-2002 2003-2007

FIRMSTRUCTURE, STRATEGY AND RIVALRY

FIRM STRUCTURE• Oligopolistic structure• 29 Cement Plants• Installed capacity of 44.6 million tons• Two Regions Market Share 1. North 80% 12.70% 9.80% 2. South 20% 7.60% 7.10% 5.50%• Major Players DG Lucky Maple Pioneer cement cement leaf cement

N.W.F.P Mustehkam Kohat Dewan Hattar Askari (Wah) Bestway Cherat Fecto Fauji Askarl Gharibwal Maple Leaf Pak Cement Lucky Dandot Zaman Pioneer Punjab DG Khan Balochistan Sindh Attock Pak Slag Dadabhoy Javodan Thatta Lucky Dewan A.C. Rohri Al Abbas Zeal PakGoing forward, scale of production and plant location will play a major role in determining the performanceof a company

FIRM STRUCTURE• All Pakistan Cement Manufacturing Association1. Projecting the cement industry to the government2. Supplies information about cement industry3. Interacts for industry problems4. Provides technical information on use of cement

FIRM STRATEGY• Prices similar• No significant product differentiation – 90-94% OPC• Production capacity expansion• Technology• Location of plant near raw materials• Transportation feasibility

The TWIST…!!!• CARTEL under the umbrella of APCMA !!!• Operating from over a decade !!!• Under probe of Monopoly Control Authority• Cement companies have been accused of cartelization thrice• Fine of Rs. 6.35 Billion in 2009 by Competition Commission of Pakistan (CCP)• Then came price wars – prices dropped 26% in one year• Harmful for small manufacturers

AROUND THE WORLD• Cement Cartels present in :1. Pakistan2. India3. South Africa4. Bahrain5. USA6. China

Cement Cartels India• 20 companies control 70% of the market• Price cartel – prices have risen by over 40% over the past year.• Cement cartel pressurized the Indian Government to impose non-tariff barriers on imports of cement to reduce supply from Pakistan.• INDIA - 300 million tonnes – operating at near full capacity.

RELATED ANDSUPPORTING INDUSTRIES

CONTENTS• Housing & Commercial Plotting ( Construction Sector)• Government Projects• Shipping Industry• Packaging Industry• Mining & Quarrying Industry• Transport & logistics

Housing & Commercial Plotting• 40 % of the Cement Demand• lending of 55 PKR billion to the private sector• 950 billion in the MTDF• Housing Sector makes up to• 50 % of the Construction Sector• Rising trend of vertically rising structures across the world.

Government Projects• Roads, Dams, Canals, Bridges, underpa sses• Significance of (PSDP)• Maintenance Projects- roads, highways, after rain spoils.• Natural Calamities- abnormal rise to demand industry- new housing schemes for affected

Shipping Industry• High cost is still a barrier in exploring the right potential• Indian cargo that loads up in 6 hours, here we take 3 days !!• Our outreach is up till South Africa• Russian Market unreachable• Prices gets uncompetitive as soon it reaches the docks of USA

Packaging Industry• Polypropylene/ Polyethylene bags• Growth of 15% compared to the world growth of 8 %• Packaging is of due importance for the cement to remain of good quality• Plastic bags & Paper bags• Two main companies that supply plastic bags, shortage of 12 million bags.

Mining and Quarrying Industry• Rich source of minerals and raw materials• Mining and quarrying sector direct demand from Cement Sector• Low skill allow high employment• Development of other kinds of Cement would allow us to utilize much of untapped area in this sector• Mining in return has allowed us to discover huge deposits of gypsum, limestone, etc. that are essential in the production of cement.

Transport & Logistics Logistics• Russian high price tag opportunity• Not yet captured Russian market• Local transportation Pakistan( $ 8/ton), India ( $ 3/ton), Iran far more competitive Transport• Trucking Sector primarily depends a lot on Cement industry• Rail transportation – efficient yet of same cost• Heavy Bulkers also earn revenues in large orders

Transport Cont…• 20 % of cement cost goes under transportation - India working to reduce its existing 7 % cost element.• Cement factories are spread over two broad regions - Southern region is relatively economical• Northern region caters Afghanistan, Iran and closer areas• Inland freight subsidy expected to reach 35 to 50 % of the overall subsidy by end of 2011.

FACTOR CONDITIONS

RAW MATERIALSThe raw materials required forCement manufacture:• Limestone (75-80%)• Clay(15-20%)• Gypsum (5%)• Iron Ore• Pakistan has immense reserves of various minerals.

TYPES OF CEMENT• Ordinary Portland Cement (OPC)• Sulphate Resistant Cement (SRC)• Blast Furnace Slag Cement (BFSC)• Slag Cement

STEPS FOR THE MANUFACTURE OF CEMENT• Quarrying and crushing• Blending and storage• Raw milling and homogenizing(Uniform Quality of raw materials)• Burning• Cement Milling ( adding Gypsum)• Quality Assurance• Packaging and cement despatch

Sources of Energy60-70% is the cost of energy in the production of cement• Coal• Gas• Oil Furnace• Electricity

Furnace oil Diesel Coal ElectricityFinancial Year (Rs./Ton) (Rs./Litre) (US$/Ton) (Rs./KWH) Jan-11 54,600 78.74 140.00 7.15 Upto - Dec- 53,670 74.72 105.22 6.63 2010 2009-2010 46,692 69.63 92.05 5.23 2008-2009 39,900 61.24 105.64 5.23 Source: APCMA Input prices

• At present most of the cement companies have switched to coal or gas as their basic fuel• Cost of cement production per ton by ; • furnace oil- Rs. 2083 • coal-Rs 868• Initially 90% of coal requirement of Pakistan cement industry were being met by imports• However the price of coal in the world market soared from $92.5 per ton to $140 per ton from 2010- Jan 2011 .

• Because of this, firms are now relying on local coal reserves; example Dandot Cement Limited acquiring 70% of the coal from Quetta.• Load shedding of gas is another major issue. Domestic consumption is very high.• The companies were relying on WAPDA for electrical supply but now the companies have their own electricity generation plants due to the problem of load shedding.• Management considering cheaper fuel sources such as RDF and Waste Heat Recovery Plant.

Reasons to Import Coal• The production of one tonne of cement consumes, nowadays, an average of 3400-5000 MJ fuel energy.• 50% in clinker burning, 20% as sensible heat in the Pre- heater exhaust gas. 3%taken away by clinker. 14% heat of cooler exhaust gas, 11% loss as radiated heat and 1% others.• Pakistan has fourth-largest coal reserves in the world but it is importing 2.5 million tones of coal per annum for the cement industry.• Local coal contains 6% of sulphur which is not suitable for cement industry.• However, the imported coal contains 1% of sulphur.

Fuel Alternatives• The cement industry may go in for used tyres to meet the 40% of fuel requirements of the industry – Like Lucky Cement and DG khan.• This method is called Refused Drive Fuel project• Recycling of the waste by making it in bundle shape and then these bundles would burn in the kiln.• Zero pollution and environmental problems• Pakistan can import sulphur washing plants from Europe• ‘Waste heat Recovery Plant’ set up by Lucky and DG cement. It utilizes waste heat to generate electricity thereby cutting costs and reducing dependence on WAPDA.

• Pulp, paper and cardboard• Plastics• Packaging• Textile wastes• Rice husk• Meat bone meal and animal fat• Waste oil• Mixed fraction from municipal wastes• Scrap wood

MACHINERY• Machinery is imported• Various components are also imported as the need arises.• R&D when it comes to setting up or manufacturing plant in Pakistan is absent. Lucky cement has no R&D department and considers R&D to be useful only when product innovation is possible.• As cement is a standard product with almost no innovation possible , standardized machinery and equipment are used to produce it - Mentality of the people in cement industry

LABOUR• Cheap labor is available, low labor cost is an advantage• Skilled, Unskilled ratio is 2:3 as determined by the research• More than 150,000 people are employed directly or indirectly by the industry• Lucky Cement Directly employees 5000 people• Engineers from NED and NUST

LABOUR• Extensive labor training is done. Lucky Cement, Dandot Cement Limited hold training sessions for employees.• Foreign experts are called in to provide training• Technical staff is needed to operate the complex plant machinery Skilled Unskilled• Electrical Engineers • Packaging• Mechanical Engineers (Kiln’s • Loading & Unloading Operators, Crushers) • Tanportation to Dealers & Plants• Chemical and Civil Engineers • Trolley men, vendors• Masters in Busniess • Helpers Administration

Technology• Until 1970- firms were based on Wet Process/Semi dry technology. However as it was more expensive and required greater amount of energy source.• After 1980- Dry Process. Presently, 85% of installed capacity is based on the dry process.• Lucky Cement using computerized control system advanced state of the art sophisticated equipment like Distributed Controllers, PLCs and online X-ray Analyzers- Quality Control• Maple Leaf Cement through its R&D has reduced the emission of NO from 4.5 Kg/ton to 1.5 Kg/ton in order to reduce the pollutants emitted.

DEMAND CONDITIONS

Factors That Drive Local Demand• Increase in Population• Urbanization• Availability of credit / decrease in interest rates• Political Stability• Economic Stability (Cyclical)• Seasonal Variations

Major Sectors of Local Demand• The per capita consumption is 145 kg.• The local demand consists of – Housing sector – 40% of demand – Private construction sector – Government Development Expenditures – Dams, roads etc

LOCAL DEMAND• Capacity utilization – 75% …. QUOTA SYSTEM• Local consumption = 18.06 million tons for the first ten months….. 6.76% lower than 09/10• Reasons – Minimal government expenditure – Floods – Economic slowdown

EXPORT DEMANDJuly 2010 to April 2011 7.6 million tonsJuly 2009 to April 2010 8.8 million tons Decline of 15%

EXPORT DEMAND• The major countries affecting Pakistani exports are – Afghanistan – China – India – African Countries – Saudi Arabia – Iran

China• Huge competition for Pakistan• Current production = 1.7 billion tons• Excess = 300 million tons• Chinese exported $160 million worth cement in first quarter of FY11• Demand in China is also expected to fall due to property tightening measure by the govt.

Saudi Arab• Restrictions on exporting removed• Cost of production lower due to low oil prices• Paki cement companies face high competition with prices charged by SA

IRAN• During the period March-Jan 2011 Iran has exported 7.424 million tons of cement as compared with Pakistan’s exports of 7.656 million tons.• Iran’s exports have increased by 61% while Pakistan’s exports have declined by 13%.• 55 cement plants in Iran. Pakistan has only 27.

SUPPLY GLUT ALL OVER• There is decrease in international demand and a supply glut in all cement producing nations like ourselves• A cold war brewing between cement makers to utilize their excess capacity• FOB prices hauled lower• Average FOB price = $ 52/ Ton• However Lucky said $58/ton

MAJOR EMERGING AND EXISTING MARKETS

African Nations• High cement demand due to – Strong GDP growth – Huge Governmental Infrastructure Projects – Energy resource exploration – Growing middle class population• Many Pakistani companies targeting this region• TANZANIA – 10% demand met by Pakistan)• African cement manufacturers lobbying to impose 35% import duty

UAE• Currently 40 Million tons capacity and demand only 14 Million tons.• Higher demand in 2008 encouraged construction of new plants.• Since demand has fallen , Pakistan’s exports to UAE have fallen drastically.

Afghanistan• Biggest importer from Pakistan• Massive reconstruction in Afghanistan 2008-2009 $150 million 2009-2010 $200 million 2010-2011 (First six $110 million months)• Increase of 23%

AfghanistanISSUES• Transit fee doubled –From Rs. 9000 to Rs. 18,000• ‘Gumrak’ issue• APCMA asks to introduce Supervised Clearance System again

NEW DESTINATIONS • IRAQ – demand double of production • SIRILANKA – war torn

India 2008-2009 $35 million 2009-2010 $40 million 2010-2011 (First six $12 million months)• Sales through land to India fell by 36%• Sales via sea to India fell by 17.27%• Clinker exports declined by 34.57%

Reasons• Delay of renewal of licenses by Bureau of Indian Standards (BIS) – Between 2007-08 22 companies were granted licenses – Licenses expired – applications were pending since 6 months – Recently approved• Refusal of Indian railway authorities to interchange loaded wagons• They want special BIS printing which cost additional Rs. 400 per ton

• Does not allow exports through Wagah Border by road.• Refuse to accept certificates by Pakistan Quality Control – They want third party• Recent trade fair in New Dehli – Our firms got smaller stalls in far away corners• Visas delayed and rejected without notifying reasons

MFN STATUS• India granted the MFN status to us in 1996• But they don’t treat us like it• We treat them like MFN but have not granted the status yet• Trade heavily skewed towards India• India exports to Pak = $ 2 billion• Pak exports to India = $ 400 million• On April 29th a Joint Working Group was established with the representatives of the two countries met to reduce non- tariff barriers• Also Pakistan agreed to grant India the MFN status in April• Pakistani Cement in India costs Indian Rs 30 less than Indian cement – Thus our cement good for India !!

Governmental Role • 80% plants in the north – Those who could not export – loss of 10 billion last year – Those who could – 4 billion profit • High inland freight costs for northerners • Govt promised to provide 35% inland freight subsidy to export by sea – Not paid yet… 8 month lapse

Governmental Role• Heavy tax structure – Federal excise duty – Rs 700/ton – Special excise duty – 2.5% (recent inc of 1%) – General sales tax – 17% – 5% on utilities• 30% of total cost = TAXXXXX = Rs87/bag• APCMA demanded not to be charged so much tax!

…THUS TAX EVASION • Miss declaration of production • Jhelum-based unit – Tax payed on 2000tons – Real production = 100,000 tons – Profit of Rs. 200 million in 1 month

High Cost Of Production • Recently 4 units closed !!! • Rs 340- Rs 355 per bag • Manufacturers cant pass on high cost to consumers due to 1. Surplus Capacity 2. Increased Competition

RECOMMENDATIONS• Coal fired power plants should be imported from China like ZEAL PAK• Import sulphur washing plants from Europe.• Government should fulfill its promise of giving subsidies.• Measures should be taken to prevent future influence of the cartel.• Encourage Research and Development – Cost saving.

RECOMMENDATIONS• Reduce Indirect Taxes, which are one of the highest in the world.• Efforts to maintain trading through Wagah Border and solve tariff problems with Afghanistan

Cement industry of pakistan

by Saad Afridi

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