Cementing growth – Prospects for Pakistan's cement industry

The year 2015 was a busy one for Pakistan’s cement industry. Not only did 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 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 total production 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 several new 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.

“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 a housing 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 building their 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, 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 50 kg 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 acquire packing 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 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.

Of course, it would be fair to question why manufacturers are announcing an increase in production capacity when there is still a surplus that needs to be disposed of. Opinions on the subject vary.

Shariff believes that the larger cement companies have a lot of surplus cash and are merely increasing capacity because they want to invest the money somewhere “but I think they haven’t really done their homework; they need to undertake a feasibility report but no one has considered this.”

Sheikh, on the other hand, says that “it takes on average about 2.5 to three years to set up a new cement plant. By the time the announced capacities come online, the capacity utilisation of the industry (currently 77%) will have reached 90% which will be a very comfortable position to be in.” Therefore he believes that this expansion will start to make sense when that happens.

Of course the huge caveat to all this is the rate of economic growth on which the cement industry and its future progress depends.

“Cement consumption has a direct correlation to economic growth, so if the economy is doing well then cement consumption will also do well,” says Sheikh.

“As of now the government is focusing on infrastructure and housing, but we can only have sustainable growth and an increase in per capita consumption if this economy continues to grow beyond seven percent per annum.”

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 and ensure growth over the next few years.

As Shariff points out, “cement is an important industry for an agrarian economy like Pakistan; it generates a lot of employment and therefore it makes sense for the government to focus on this industry.”

For feedback, email aurora@dawn.com