Cement Industry: Anything bright on the horizon?

May figures showed Pakistan's cement sector declined by almost 36% year-on-year (YoY), with local construction activity at a standstill due to the Covid-19 pandemic and subsequent lockdown.

The cement industry has been struggling recently. May figures showed Pakistan’s cement sector declined by almost 36% year-on-year (YoY), with local construction activity at a standstill due to the Covid-19 pandemic and subsequent lockdown.

A much needed boost to Pakistan’s exports

However, a bright light appeared on the cement sector’s horizon as DG Khan Cement Company Limited (DGKCC), one of Pakistan’s largest cement manufacturers won orders for cement export to the Philippines. This gives a much-needed boost to Pakistan’s exports, that have declined by over 6.8 percent during 2019-20, due to the economic slowdown which Pakistan was already going through, and further accentuated by the coronavirus pandemic. Pakistan’s total cement sector registered a decline of 36% year-on-year. Overall, the country’s exports at the end of the fiscal year ended June 30, 2020, stood at $21.387 billion against a target of $24 billion.
As Advisor to PM on Commerce & Investment Razak Dawood congratulating DG Khan in a tweet pointed out, “increasing geographical diversification is an important part of our strategic trade policy”. The Advisor said exporters should follow this example of extending their market reach across the globe.
According to All Cement Manufacturers Association DG, Khan Cement (DGKCC) is the third-largest cement manufacturer of Pakistan with a production capacity of around 22,400 tons per day (7.1 million tons/annum). DGKCC has four cement plants, two plants in Dera Ghazi Khan, one at Khairpur Distt, Chakwal and one at Hub Lasbela District.

Read More: Pakistan’s Special Economic Zones: Challenges & Opportunities ahead

Cement Industry going through a rough patch 

The cement industry has been going through a tough period since 2017. The capacity of the industry was significantly increased by manufacturers who had expected an increase in activity after the CPEC project was launched.
According to the All Pakistan Cement Manufacturers Association, production capacity increased from 46.4 million tons in 2015-16, where plants operated at 85% capacity utilization to 69.1 million tons by March 2020, and according to industry sources now capacity utilization is between 65-70%.
A suspension of trade with India further hit the industry. India stopped cement imports from Pakistan after the Pulwama attack in February 2019. Pakistan suspended all bilateral trade with India after August 5 when India revoked Articles 370 and 35A and converted Indian occupied Kashmir into Union Territories. Earlier, Pakistan was exporting an average 75,000 tons of cement to India every month.
Cement exports makeup generally around 10 percent of the industry’s sales. Unfortunately, post corona – they have seen a massive decline, overall uptake in export destinations like Afghanistan, Vietnam, Sri Lanka and Bangladesh has gone down.
This was further compounded by a steady decrease in the cement price per bag, and the dip in demand due to contractionary monetary and fiscal policies. Prices have come off almost 15% for cement bags. Last year Central Punjab price was around Rs630, Rawalpindi Rs600, and Peshawar Rs580 – they have fallen over Rs120 in most areas. Currently, cement manufacturers prices of cement bags are around Rs485-500 per bag.
According to industry analysts, cement sector companies are expected to post losses of around Rs7 billion. Seven cement companies; Attock Cement, Bestway Cement, DG Khan Cement, Fauji Cement, Kohat Cement, Lucky Cement and Maple Leaf Cement have all declared losses in the third quarter of the previous fiscal year. The five northern-based plants incurred gross losses in the third quarter and were unable to recover their production cost. The daily production of the industry stands at around 174,000 tons, while daily consumption lies at 125,000 tons.

Taxes overload

The cement manufacturing units started incurring further losses after the implementation of new taxes as the government extended the duty taxes by 33% in the sector from the budget 2019-20. The cement industry went towards paying close to Rs195 tax per bag – highest in the region. The government recently increased royalties from Rs20 per ton to over Rs200 per ton; the Balochistan government increased even more by over 300%.

Axle load implications for Cement industry

Government implementation of axle load limits in November 2019 saw freight cost rising by over 50%. The average freight cost went up to Rs75 per bag from Rs50 per bag for transportation from the cement manufacturing unit to the end-user. Unfortunately, at the same time due to a massive decline in drop and overcapacity in the industry, it was not able to pass on the added cost to the consumer.

Fuel price surges

The industry has also been hit through rising electricity costs. An industry source gave valuable insights into the cement sector’s dynamics. He explained that electricity costs have risen from Rs 10/unit to Rs 17.25/unit during the past one and a half years.
Similarly, the price of other energy inputs like coal went up by 70-80% in the pre-pandemic months, hitting the cost structure of the industry. Coal prices surged the past couple of years and went from Rs10,000 to hit a high close to Rs19,500 per ton before coming off slightly due to corona. Now Afghanistan coal is around Rs16,000 and South African coals around Rs17,000.

Budget 2020-21: Government support for the cement industry

A positive development that will help the sector to some extent came in the latest 2020-21 budget. The federal government has moved to reduce indirect taxes on cement sales by reducing the FED by PKR14.63/bag. The industry was giving FED Rs2.0 per kg, which in this budget, the government has reduced to Rs1.50 per kg; however, on one bag this still makes it around Rs75.00 FED per cement bag. Industry experts still maintain that taxation on cement sales remains high and had been expecting a cut close to Rs50-100/bag. Furthermore, the government will also decrease by two percent, the additional customs duty on coal imports from five percent previously to now three percent.
Moreover, the government also announced some PSDP schemes, including Rs69 billion allocated for dams, and Rs30 billion given for the Naya Pakistan Housing Scheme, which should help to increase demand for cement. Also, they partially fulfilled a long-held demand by the cement sector that government remove the CNIC condition for transactions over Rs.50,000, given that most of their buyers are not tax filers. The limit was increased to Rs100,000.

Given a lot of the cement companies are also debt-heavy given recent investments in plants, the reduction of over 6% in the interest rate will also help in their financing costs. Finally, the world-wide reduction in energy prices will also filter through as a reduction for their cost side – although the dollar devaluation tempers this benefit.

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