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Local Demand Vs Exports – Dilemma Of Pakistan’s Cement Sector

LOCAL DEMAND VS EXPORTS -- DILEMMA OF PAKISTAN’S CEMENT SECTOR

[dropcap]D[/dropcap]espite 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 (Khyber Pakhtunkhwa and Punjab) have shied away from exports due to prohibitively high costs of inland transportation.

The sector is running at 97-99 percent capacity utilization per month because of the local demand and with that in mind, the sector is expanding by nearly 30 million tons over the next five years, with some expansions coming through as early as next year. The announcement of the China-Pakistan Economic Corridor (CPEC), 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. If local demand continues to grow at this rate, the incremental production will get absorbed in the beginning, but if exports continue to drop and local demand fluctuates, we will be left with oversupply.

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Exports used to be 35 percent of all dispatches in 2009. By 2015, Pakistan’s export share fell to 20 percent and further down to 15 percent in 2016. In 11 months of FY17, they stand at 11 percent. 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. Decreasing export rates could also be attributed to the increased influx of Iranian cement in Afghanistan, as well as increased tax on cement in Pakistan, increasing the cost of cement within the country to almost double that of its neighboring countries. In 2015, there were also reports of increased cement smuggling, which many saw as a way of dodging increased cement duty and as a result foreign exports were affected.

Cement manufacturers believe that they are unable to get access to foreign markets because of the high cost of doing business here at home—with high energy costs, and coal duties. But this is difficult to see because the sector is highly energy and cost-efficient working at 40-50 percent gross margins. Under FED regime, cement prices have reached all time high averaging at almost double that of its neighboring countries.At present a 50kg bag of cement costs from around Rs500 in Pakistan, whereas the same 50kg bag costs from around Rs292 in neighboring India. 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.

[box type=”note” align=”” class=”” width=””]The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan[/box]

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