Introduction

In the backdrop of COVID19 related closure of markets, lack of exports, and lockdowns, Pakistan was successfully able to revive its economy and protect it from spiralling into further debt on the back of the construction sector. This provided an essential boost to the cement industry of Pakistan, which already faced the challenge of a high supply and low demand. The cement sector of Pakistan is a booming industry with impressive year on year growth trends, and with timely government intervention, the industry was able to achieve staggering growth in FY2020. In addition to local consumption, Pakistan also exports cement to multiple countries, including Afghanistan, Oman, Qatar, and others. However, challenges of supply and cartelization have greatly increased the price of cement in the local market, with almost all companies selling one 50kg bag of cement for above Rs 600. Continue reading to understand the cement industry of Pakistan and its prospects and challenges.

Cement Sector of Pakistan

Cement is an essential part of infrastructure development and has a huge economic impact due to complex supply chain processes. Global cement consumption is estimated to decline owing to the outbreak of the covid-19 pandemic. However, the large-scale manufacturing sector contributes approximately 9.5 percent to Pakistan’s GDP, and the government of Pakistan announced a series of incentives during the fourth quarter of FY2020 to boost the sector (PES, 2021). The cement industry of Pakistan has an overall 5.3 percent share of Pakistan’s economy (SBP, 2020). It is a significant sector due to its direct influence on the country’s infrastructural developments, construction activities, and linkages with multiple allied sectors such as steel, wood, and tiles. The overall size of the sector is recorded at Rs. 345 million during FY2020 compared to Rs 413 million in FY2019, a decrease of 17 percent due to reduced prices in the North Region amid increased supply and reduced demand (APCMA, 2021). As a result, the sector contributed 0.85 percent to Pakistan’s GDP in FY2020 (PES, 2021).

The Cement Sector is composed of 19 companies, of which 16 companies and 24 plants are operational. The sector is divided into two regions: North and South, with North covering areas of Punjab, KPK and AJK and South including areas of Sindh and Balochistan. The cement sector is highly organized and is oligopolistic in nature, with most players listed on the PSX. Market capitalization for the sector is estimated at PKR 690bln. The growth of the sector is primarily driven by overall economic growth and government spending on development projects (AHL Research, 2021).

The per capita cement consumption in Pakistan is around 182 kg, whereas the world average per capita consumption is around 500 kg, more than double the consumption in Pakistan, indicating a vast opportunity to grow cement consumption. Pakistan’s local cement dispatches were recorded at around 40 million tonnes in FY2020. The demand for cement is highly correlated to government spending on development projects through the Public Sector Development Program (PSDP). Due to the widening fiscal deficit, PSDP spending has greatly reduced over the last couple of years. The cumulative spending of PSDP decreased by 28 percent from FY2019 to FY2020. However, due to China Pakistan Economic Corridor (CPEC) related developments, the overall demand remained sustained at 40 million tonnes for the last three years. The incumbent government also announced a construction package worth Rs 100 billion in FY2020. The package includes tax incentives, waivers, and subsidies for builders, developers, and property owners. The step greatly increased private sector investment in construction, and therefore, boosted demand for cement (Jamal, 2020).

Prospects and Challenges

There are several factors that indicate a promising cement industry in the future years. Rising demand from government-related projects such as the Naya Pakistan Housing Program (NPHP), construction of dams, and CPEC related activities have encouraged the sector to expand its production capacity further. Also, the reduction in the policy rate by the State Bank of Pakistan has increased the borrowing capacity of developers, making it an attractive opportunity for the cement industry. Also, major raw materials used in cement manufacturing, such as limestone, clay, and gypsum, are found in abundance in Pakistan. However, these raw materials constitute only 4 percent of the manufacturing cost. Due to the process being energy-intensive in nature, a majority of the cost is constituted of fuel such as coal. It is a relatively cheap source of energy and is extensively used by cement companies. It accounts for 40 percent of the total production cost of cement. A majority of cement manufacturers also rely on imported coal to meet their energy needs, which means they are overexposed to the exchange rate and fluctuations in international coal prices. Coal imports in FY20 were recorded at USD 1,313 million with a year-on-year decrease of 14 percent, whereas the quantity imported increased by 5 percent during the same period. That is mainly owing to a fall in coal prices due to COVID19. Companies in the South are located near to ports and must bear significantly lower transportation costs compared to companies in the North. However, companies in the North have better access to exports to Afghanistan and India. Dewan Cement and Lucky Cement are the only companies that have manufacturing plants in the North and the South.

In terms of the prospects, the cement sector enjoys a low threat of entry of new players as the cost of entry is very high, and there are extensive regulatory requirements for establishing new plants. Raw materials are high in abundance, and considering the homogeneous nature of the product, there is always going to be an abundance of materials for cement manufacturing. In terms of substitutes, cement is an indispensable component of construction and enjoys a very low threat of substitutes. Furthermore, Pakistan has an abundance of skilled and unskilled labour at a low cost. In light of the many development projects being implemented, there is also a strong demand potential. However, in terms of challenges, the rising cost of energy products, reduced PSDP spending on development projects, rising environmental concerns related to manufacturing of cement, competition with cheaper Iranian cement, and a possible wave of covid-19 inflicted lockdowns are some of the threats faced by the cement industry. There is also a strong reliance on the consumption of depleting natural resources, imported coal, exposure to exchange rate volatility, extensive regulatory requirements, and the inability to pass the cost of production to end-users. However, government initiatives to spur construction activity and establish a large number of low-cost housing has resulted in an uptick in construction activity. Pakistan’s GDP has also recovered from reduced financing costs leading to investment opportunities (PACRA, 2021).

Conclusion

The cement sector of Pakistan is a booming industry with impressive growth trends. With timely government intervention, the cement industry was able to achieve staggering growth in FY2020. In addition to local consumption, Pakistan also exports cement to multiple countries. Cement is an essential part of infrastructure development and has a huge economic impact due to complex supply chain processes. As the cement industry increased its production capacity, the disaster of covid-19 struck and restricted activity in the construction sector. However, in the backdrop of government incentives, development schemes, construction of dams, and tax breaks, the construction sector of Pakistan showed signs of increased activity and investment. Therefore, future developmental projects show a promising future of the cement industry in Pakistan.

Bibliography

AHL Research. (2021). Pakistan Strategy 2021.

APCMA. (2021). Historical Analysis of Cement Production Capacity & Despatches (Operational Units Data). Retrieved from https://www.apcma.com/data_history.html

Jamal, N. (2020). What is driving cement sales. Retrieved from https://www.dawn.com/news/1590504

PACRA. (2021). Cement.

PES. (2021). Manufacturing and Mining . Retrieved from https://www.finance.gov.pk/survey/chapter_20/03_Manufacturing_and_Mining.pdf

SBP. (2020). The state of Pakistan’s economy.