Everyone having some interest in the economic matters must have heard economists saying that the construction industry set in motion 40 allied industries. This is a tested hypothesis and easily traceable in correlation between sales of cement, a most important constituent of the construction industry, and economic growth. Because of this representative nature of the cement, I call it ‘poster commodity’ of the construction industry.
Global cement industry is among the initial industrial sectors to recover from the adverse effects of the Covid-19. Pakistan cement industry is not an exception to this and recovered with a growth of about 20 per cent in the year 2020-2021. This is one of the highest growth rate in the cement industry. Though, this YoY growth can be attributed to stagnant growth in the year 2019-2020, but still this a phenomenal recovery supported by various incentives given to the construction industry by the Government of Pakistan.
If we analyse and forecast for the next 4 years, the global cement consumption excluding China is expected to grow by 5 per cent yearly till 2025. This is a good growth rate for any industry. Pakistan’s local cement consumption is also expected to have CAGR of 7 per cent till the year 2025 taking the local consumption to 65 million tons per annum. The export of cement may remain steady around 5 million tons a year with export of clinker adding to it by 3 to 4 million tons per annum. Foreseeing this robust growth in the cement consumption the Pakistan cement industry has entered into a third phase of the expansions made during the last 20 years. The current production capacity of the cement industry of Pakistan is 69 million tons per annum that was 16 million tons per annum at the start of this millennium. Even with comparatively small production size at that time, capacity utilisation was 64 per cent in the year 2001, which has now grown to 85 per cent despite an increase of more than 300 per cent in the production capacity. Per capita consumption of the cement has also increased from about 72 Kg/head in 2001 to 233 Kg/heading 2021. This cement consumption is still well below global per capita consumption of 540 tons projecting significant potential for growth in cement consumption in Pakistan.
This remarkable opportunity does not come without challenges. The biggest challenge would be to control the cost. The production cost of the cement is under substantial pressure due to rapidly increasing coal prices, energy and fuel cost. The coal price is expected to remain under pressure until mid-2022 due to current rebound in coal demand. However, this surge is likely to be short-lived and the prices may start declining and return to normal in 2022. The world is committed to surpass coal as the largest source of electricity by 2025 and China is abandoning the various coal power plants. Despite the share of the coal in the electricity-mix and overall energy-mix is bound to decline due to environmental pressures, but it may not experience a rapid fall at least till 2025-2026.
The cement companies would also have to take cost control efforts to compete profitably in the emerging market competition. The cement industry of Pakistan is quite proactive in taking such cost cutting measures. They are going for alternate energy solutions, waste heat recovery plants, switching over to relatively cheaper PP bags to save on packaging cost, to name a few.
Another obvious challenge would be to cater to the international environmental standards to contribute to the international efforts to stop global warming by adopting latest technologies to control pollution including carbon emission. Cement is estimated to induce one ton of CO2 for each ton of cement produced. Similarly, emissions and water pollution are also attributed to the production of the cement. Environment Protection Agency is also becoming more and more relevant these days by making laws and rules to ensure compliance to the international environment standards to overcome pollution issues. Legislature and courts are also taking cognizance of environment related hazards caused by industrial processes. As such, the cement industry would have to keep abreast of the international environment standards and have to install the equipment to control the emissions and water pollution etc. The major focus of the Environment protection agency till 2025 would likely be on emission control and water pollution. The companies lagging behind in taking initiatives to overcome this pollution would definitely miss the road to sustainable growth.
The cement industry is a capital-intensive industry and is providing direct and indirect employment to tens of thousands of people contributing to employment opportunities. Moreover, It contributes more than Rs. 160 Billion annually to the Government exchequer in the form taxes. Cement Industry, a vital contributor to the economy, needs support from the government by reducing/rationalising taxes and facilitating its operations. Cement has one of the highest excise duty in this region. Excise duty is generally imposed to discourage the purchase of certain goods / items. As cement is main constituent of the housing sector that is a basic need, the Government should consider a decrease in excise duty. The role of the competition laws cannot be denied to ensure healthy competition and in protection of the consumer rights, but at the same time these competition laws should not be used to inhibit industry growth.
Since 2019 the Covid-19 pandemic have done havoc to the human life and also changed the work life and consumers’ buying patterns etc. Many industries suffered, some businesses were closed but cement industry is among those lucky sectors that are least troubled by this pandemic. After a stagnant growth in 2019-20, the cement industry has recovered momentously and had more than 20 per cent growth in 2020-21 highlighting future prospects for the industry. To avail these opportunities emerging from promising future forecasts, the cement industry has to proactively take up the environment protection efforts and cost cuttings measures.