The cement industry is preparing to reap the benefits of upcoming mega projects under China Pakistan Economic Corridor (CPEC).
Players in the cement industry are set to enhance their cumulative production capacity by almost 50 percent in the next few years with an estimated investment of $2.12 billion, according to the analytical report published by State Bank of Pakistan (SBP).
The cement industry is currently undergoing a major transformation, as a number of players are planning capacity expansions. Specifically, almost half of the players in the industry have so far announced capacity expansion, and more than 3.0 million tons capacity has already been added in the outgoing financial year FY18.
In cumulative terms, this would add 23.4 million tons towards the production facility – a staggering increase of about 50 percent over the next few years – to reach around 72.8 million tons. The expected expansion may be even higher if other firms (with 8.1 million tons in the pipeline) also join this campaign.
The expansion of production capacity is likely with the increase in foreign and local investments, setting up of different manufacturing units, generations of jobs, tax revenues and related businesses, synergizing allied industries such as steel, marble, wood, engineering, etc,.
On the other hand, the industry will make imports of machinery for the planned expansion.
According to information collected from firms and PSX notices, the additional capacity would result in the imports of the machinery of around US$ 1.5 billion (near Rs 178 billion) over the next few years. In the cement industry, the cost of machinery imports comes around 70 percent of total cost of the unit/project. This means the overall estimated cost of expansion would be around Rs 254 billion.
The factors behind this extraordinary expansionary drive in cement industry mainly include:
- Continued activity under CPEC related projects: The prospect of growing cement demand are stemming from CPEC related project which include construction of an integrated road infrastructure; modernization of railways; and development of Gwadar city, seaport and airport. Moreover, the development of special economic zones across the country may also sustain demand for cement going forward.
- Increased focus on development spending by the government: The demand for cement is also likely to remain high as government has a planned numerous mega projects. In this regard, the worth noting mega water and power sector projects include: Dasu, Diamer Bhasha and Bunji multipurpose projects; and major rehabilitation and expansion of Mangla, Tarbela and Warsak power stations. In addition, large highway and motorway projects (which are outside the ambit of CPEC) have been initiated by the government.
- Huge construction activities due to housing deficit: The demand pressures may continue going forward due to persistent housing shortages (bridging this gap would require huge quantity of cement and related construction materials). The room for growth is evident from the fact that per capita cement consumption in Pakistan is the lowest amongst regional economies.
- Economies of Scale, & Export of Cement: With current expansion plans, the industry might be able to exploit economies of scale and gain competitive advantage. While there is a need to explore new markets to utilize their excess capacities post expansion, efforts in this regard could also increase export earnings in coming years
However, for a sound market share in export market, the cement manufacturers will have to compete with Iranian and Chinese cement manufacturers through improvement in cost efficiencies.
Cement Industry-Current Dynamics and Future Prospects Sustained expansion in economic activity and investment in various infrastructure projects under PSDP and CPEC, coupled with increased demand from private housing schemes have bolstered construction sector during last few years.
Margins of Cement Industry Are Higher
Healthy profit margin is another important factor that helps the industry to undergo capacity expansion. Specifically, the gross profit to sales ratio has averaged around 33 percent for the last five years – more than double the manufacturing sector’s overall average.
The industry benefited from a slump in global market for raw material (e.g., POL and coal) and historic low domestic interest rates. The margins for the industry strengthened when, instead of passing on the benefit to consumers, firms increased the local retail prices.
Overview of Cement Industry
The cement industry is important for the economy. Besides making a direct contribution of 7.5 percent to large-scale manufacturing, the industry influences growth in the allied segments (e.g., steel; chemicals, wood etc). At present, there are 24 manufacturing units operating in the country with a total installed annual capacity of 49.4 million tons.
The industry operates in two separate zones – North and South – with Northern Zone representing around 80 percent of the total production capacity and sales. The manufacturers in the South Zone have more room for revenue diversification as they can tap a number of export markets. The export potential for manufacturers in the Northern Zone, however, is limited to Afghanistan and India only.
The cement industry is also very competitive as manufacturers strive to maintain their market share, which drives up their production capacity. A historical review of the industry suggests that the firms strategize their capacity expansions to uphold their position in the market. In some cases, established and strong manufacturers even acquire smaller firms. As a result, the overall market share of large firms undergoes only a minor change following an expansionary phase.