Editorial – Cementing for success?

Cement and steel are among the basic commodities that act as key economic indices in measuring a country’s rate of development, and both these commodities seem to be showing a (cautiously) upward trend in Pakistan. This is not to say that they are by any means attaining their full potential.

Of the two, the cement industry presents the brighter picture. Local demand registered a 12% increase last year and with four cement companies having already announced an intention to increase their capacity – and thereby increase net production of cement in Pakistan by a further 7.7 million tons (from 45 to 53 million tons) – taking overall growth to about 17% annually. Furthermore, the industry has to a large extent overcome the significant dip in the export market through increased local demand. The industry, however, is heavily taxed (the government needs money) and this in turn affects pricing.

Steel, although showing signs of improved production, is still struggling as an industry, despite the fact that several players appear to be getting their act together and seem set to further increase their production capacity. At present, steel production in Pakistan stands in the region of six million metric tons a year; however due to the dismal conditions of Pakistan Steel Mills (PSM), no credible projection is available regarding by how much this will increase in the next few years.

The difference in the overall outlook for the two industries is due to a number of factors – and as far as steel is concerned, much can be attributed to the inability of successive governments in Pakistan to halt the systemic decline of PSM. Added to this, steel as an industry is fragmented with multiple players unable to coalesce the industry organisationally. Government policies have not been particularly helpful to the industry, especially the low import duties levied which often make imported steel cheaper compared to steel that is manufactured locally.

The silver lining for both industries has been the relative strength of the real estate market, although unfortunately this is driven mainly by the construction of luxury housing projects and malls – despite the fact that Pakistan is said to face a housing backlog of nine million low income units. Now, looming on the horizon is the prospect of the $46 billion China-Pakistan Economic Corridor (CPEC), bringing with it a mega infrastructure bonanza.

Therefore, some cause of optimism, although unfortunately, the government is being its customary coy self and has so far been reluctant to divulge precise information about how, where, and when this money will be spent. If the current attempt to bulldoze the privatisation of 26% of PIA’s assets is anything to go by, it seems that the government is unlikely to do the sensible (and transparent) thing by including all stakeholders in a debate that would not only bring clarity to the entire enterprise, but set a roadmap aimed at ensuring that the right kind of investments are made across all sectors impacted by the project. (In this context, it is worth emphasising that there exists considerable scepticism in the steel industry about the extent they would benefit from the CPEC bonanza, the fear being that China will insist on using its own steel and so leave local manufacturers out in the cold). This may initially prove to be a painful exercise (especially for the government), but once done there could be a real chance that the inefficiencies and leakages that persistently dog all large scale projects in Pakistan may be significantly reduced. Wishful thinking in all likelihood.

Yet, Pakistan is in sore need of more housing and better infrastructure all around (CPEC notwithstanding). Even our metropolitan conglomerations and larger cities, present an antiquated ‘third world’ look with crumbling infrastructures (electricity, water, sewage...) and shoddy roads interspersed with gleaming malls and luxury housing. The government’s ability to generate the required funds is of course an issue, but that is only half the story. At the root of this lies bureaucratic apathy, untrained manpower, an intractable energy crisis and endemic corruption. Pakistan’s private sector cement and steel companies are able and willing to pick up the slack, but they need to be given a level playing field.