The cement sector in Pakistan has experienced significant growth since 1947, with production capacity increasing from 0.5 million tons to 44 million tons currently. The industry was nationalized in the 1970s but deregulated in the 1980s. Leading cement companies have recently announced expansion plans that are unlikely to significantly impact the existing cartel dynamics in the sector. Mergers and acquisitions over the past decades also did not strongly affect the cartel. Further growth opportunities exist through various infrastructure projects. Cement manufacturers are increasingly using alternatives to gas like coal and oil to reduce the impact of energy shortages and costs. A price war is unlikely given that no players benefited from previous wars and large players can't afford one currently due to excess capacity

1. GROUP NAME:
CEMENT SECTOR
ANALYSIS

2. Introduction of Sector
1947
• 4 cement factories-capacity of 0.5 Mln
tons
1972
• 14 cement plants-2.5 Mln tons
• The industry was nationalized
• The state cement corporation of Pakistan (SCCP) was established
1985-86
• Cement industry was deregulated
• GDP growth rate of 6.5%, high import of cement
• Process of privatization occurred in 1991
2000-10
• Increased production capacity from 16
million tons in 2000 to 44 million tons in 2010
2014
• Production capacity as on march 2014 is
44.64 million tons

3. Significance of Industry
 Second best performing sector in KSE.
 Pakistan is the 5th largest exporter of the
world.
 Cement export ranked 10th in the major
export list of Pakistan.
 Major export market:
 Iraq
 African countries
 Middle eastern countries
 Afghanistan
 India

4. Export share
Source: APCMA

5.  Q1. Recent expansion plans
announced by leading cement
manufacturers … what are they and
how is that going to affect the cartel
dynamics?

6. Expansion plans of Cement
sector
 DGKC is planning to add capacity of
2.5-2.6 million tons in the northern &
southern region.
 Cherat cement company is looking for
expansion.
.

7. Continue…..
 Lucky Cement Pakistan's first plant in
Iraq would start production by end of
this year.
 Lucky Cement is also making an
investment of $ 230 million to set-up a
cement plant in Congo

8. How Expansion
Effect on Cartel

9. CARTEL
 A cartel is a collection of businesses or
countries that act together as a single
producer and agree to influence prices for
certain goods and services by controlling
production and marketing.
 Adam Smith, the father of modern
economics: “People of the same trade
seldom meet together, even for merriment
and diversion, but the conversation ends in
a conspiracy against the public, or in some
contrivance to raise prices”.

10. Expansion affect on cartel
 "No one can stop you if you want to
increase your capacity because it is
the right of the company," Tabba CEO
of Lucky Cement.
 According to directors of Lucky and
D.G khan cement: “There is no such
effect on cartel due to expansion plan
of some cement manufacturer.”

11.  FCCL, brought the country’s largest
single line plant (7,200tpd) in FY12 to
become the 4th largest cement
manufacturer in Pakistan having
capacity of 3.4mn tons, from only
1.2mn tons previously. This
aggressive capacity addition has
started bearing fruits as the company
has already achieved 26% YoY
volumetric growth during 9MFY13.

12.  Q 2. Mergers and acquisitions if any
… possibilities and likelihood?
Companies interested in acquiring
other companies? why? Impact on
cartel dynamics?

13. Mergers and acquisition
 In the year 2004, Dewan Cement
acquisition of controlling stakes in
Pakland and Saadi Cement.
 Dewan Mushtaq Group acquired 36.2
million shares (62.8 per cent holding)
of Saadi Cement and 34.6 million
shares (41.9 per cent holding) of
Pakland Cement.

14. Cont…
 In the year 2005, Al-Abbas group
including two stockbrokers and an
industrialist jointly bought Essa
Cement Limited, by paying the
liabilities against the majority share
holding.

15. Effect of Mergers and Acquisition
on Cartel
 By reviewing the history of Mergers
and Acquisitions there is no significant
effect on cartel dynamics.

16.  Q3. Further Growth potential within
the sector?

17. Growth Potential Within The
Sector
 SWAT: The Khyber Pakhtunkhwa
government would construct 350 small
dams in the province, ( Imran Khan).
 Darawat dam in process.

18. Cont….
 Karachi-Lahore motorway
 Jamshoro coal power plant.
 Dasu Hydropower Project
 Two coal-based power projects at
Gadani

19.  Q4. Consider power related issues ..
type of fuel mix being used to
neutralize impact of high electricity
cost and gas shortage.

20. Power related issues
 60-70% is the cost of energy in the
production of cement.
 Coal, Gas, Oil furnace, Electricity
 Initially 90% of coal requirement of
Pakistan cement industry were being
met by imports.
 Loadsheding of gas is another issue.
 Relying on WAPDA for electric supply
but now the companies have their own
electricity generator plants due to
problem of loadsheding.

21. Cont….
 Stagnant supply of domestic gas;
persistent inefficiencies in energy-
related public sector enterprises and
inadequate infrastructure for gas
import. “While all economic sectors
have been affected by the energy
shortages, the industrial sector has
been the worst hurt,”

22. Cont…
 “It is estimated that around a dozen
re-rolling units in Punjab have installed
coal gasification plants in the previous
two years,” the report revealed and
added that those plants were imported
from China, with cost ranging widely
between Rs4 million and Rs30m,
depending upon size and
specification.

24.  Q 5. Distribution/ dispatch issues …
exports less attractive since PKR is
now stronger but at the same time
cost of goods imported is now lower
(e.g. Coal).

25. Distribution/ dispatch issues
 Coal is the single largest cost
component for the cement
manufacturers, constituting around
45% of the manufacturing cost.
 Cement sector has been the major
beneficiary of falling coal prices in
FY13

27. Cont…
 5.6% PKR appreciation against
greenback since Jan’14
 A threat for companies having larger
share of exports. Rupee appreciation,
if sustained, can have material
earnings impact for cement industry
as exports contribute 25% of total
industry sales.

28.  lower coal cost
 South African R-Bay coal prices
are hovering at US$72.8/ton, down by
14% since Jan’14.
 We have incorporated coal price of
US$80/ton for FY14 in accordance
with Macquarie Research.

29. Cont….
 The earnings impact on FS cement universe
in two scenarios;
 1) coal price of US$80/ton (-7%) coupled
with exchange rate of PKR106/USD (+3%)
and
 2) 13% decline in coal cost to US$75/ton
amid 5% PKR appreciation (PKR104/USD).
 Under the scenario 1, FS cement universe
earnings may increase by 2.4-5.4%. Decline
in coal prices largely offset the negative
impact on cement players of PKR
appreciation due to export sales. The
earnings can go up to the tune of 4.5-10.4%

30. Cont…
 Stronger than expected forex reserves
have appreciated PKR by 5.6% against
USD since Jan’14 posing pressure on
companies having larger chunk of
exports in their sales mix.
 However, lower coal prices
of US$72.8/ton would play a mitigating
factor and likely boost primary margins
to record a high of 63-65% if prices
remain intact.

31.  Q 6. Price war ... Is it possible? Why?
When?

32. Price War
 Growing mistrust amongst industry
players on the price mechanism grew
so much that major players threatened
to leave the (APCMA).
 Investors were fearful of the re-
emergence of a price war. The cement
companies have adopted a more
accommodating attitude and are now
settling their issues to try to, and
remain, on the same page.

33. Cont…
Nobody is a winner in a (price) war!
 The local cement industry learned hard
lessons from the past price wars, when
nobody came out as a winner. Small
and medium cement players were
suffering from losses while big players
were only witnessing subdued earnings
growth

34. Cont..
Only big players can dare, but even
they can’t afford it!
 Strong likelihood of breaking up the
status quo could only come from large
cement players, who are operating at
lower utilization levels.
Healthy demand growth lowers the
probability of price war

36. References
 http://www.google.com.pk/#q=apcma
 http://www.comcom.govt.nz/business-
competition/fact-sheets-3/merger-
assessment/
 http://thefinancialdaily.com/NewsDetail
/146513.aspx
 http://www.apcma.com/data_monthly1
314.html
 http://www.investopedia.com/