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Has the cement sector monopolized Pakistan’s flailing economy?

Amidst the declining economy due to COVID-19 lockdowns, Prime Minister Imran Khan announced several relief incentives for our local industries. However, the increased prices of cement and other raw material raises several eyebrows on the construction industry. Is the cement sector monopolizing on our national struggle? Brilliant Cement sector expert, Lt. Col. Mian Mujtaba Kamal (Retd) gives his insight to help us understand the dilemma.

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The year 2020 will forever be remembered as the year of Coronavirus, which laid stagnant community growth – personally and economically. While many leaders, worldwide, aided their populaces with financial aids, the Prime Minister of Pakistan offered tax cuts and incentives to local industries. A major benefactor among these is the construction industry. This in turn is dependent on several sectors, including the cement business. Many believe that the cement sector has monopolized the situation and brought forward a ‘cartel’, just like old times.

COVID-19’s impact on Pakistan’s cement sector

According to data released by Arif Habib Ltd (AHL), cement retail prices in the north region have increased on average by 4.62% – that is, from Rs 497 per 50-kilogram bag in April to Rs 520 in May. A similar rise was noticed again in July, after Khan announced major construction projects and provided a subsidy of Rs 30 billion for the Naya Pakistan Housing Project.

Therefore, such illogical increases in costs ascended a significant rally in cement stocks. Between June 25 and July 16, the price of a 50 kg bag went up by Rs 40-45 in the twin cities of Rawalpindi and Islamabad. This is the highest rise that the country has seen cumulatively.

Read more: Askari Cement is in full swing to fight COVID-19

To discuss this, a representative of Global Village Space shared a dialogue with Lt Col Mian Mujtaba Kamal (Retd), Manager Marketing and Sales Support Askari/Fauji Cement. According to Kamal, “cCment is one of the most robust industrial sectors of Pakistan. The industry employs a total 3% of the overall workforce of the country. Over the past five years the sector has contributed over 200 billion PKR in taxes. The industry is pivotal in pushing growth of allied segments of construction related products i.e steel, chemicals and wood. There are 25 cement producing units in our country with more than 60 million metric tons of annual production”.

About Askari Cement

Askari Cement Limited is one of the leading manufacturing companies in Pakistan’s cement sector. It originated 99 years ago – in 1921 – under the name of Associate Cement Company. Since then, it has progressed very effectively and gained the trust of millions of people around the globe. The company aims to respond to the World’s demands for housing and infrastructure.

Read more: Fauji Cement hosts plantation drive on 14th August!

Currently, Askari Cement has two plants in operation one is located in Wah, Punjab Pakistan and the other in Nizampur (Khyber Pakhtunkhwa), with a combined production capacity of 9,345 tons per day. These plants have been designed by the world’s best global engineering companies like, FL Smidth of Denmark, M/s Holder Bank Consultants of Switzerland, M/s Tianjin Cement Design & Research Institute, China and M/s China Building Material Industrial Corporation (CBMC).

Current standing of Askari Cement

As of January 10th 2020, Askari Cement Limited (ACL) formally entered a Resource Sharing Agreement with Fauji Cement Company Limited (FCCL). This delineates sharing of marketing and procurement teams, higher management and resources. However, both the companies manage their finances separately. Colonel Mian Mujtaba revealed that independent finances ensure decreased losses for the companies.

So, has the cement sector monopolized the current situation?

Given his vast work experience in the cement sector, Colonel Mujtaba is almost a ‘Cement Consultant’. When asked to comment on the apparently unjust hike in cement prices, he had deep insight. He explained that the stagnancy during the lockdown resulted in a loss of billions of Rupees for the cement sector. Such a setback, along with sales taxes etc. indicated a large rise in cement cost, in order to break even. Furthermore, the cost of running kilns (which already require millions to start up) increased on account of raised electricity costs. An amalgam of all these sources pushes up the cement cost by folds.

The expert also pointed out that a rise in the Dollar rate also directly effects the cement sector; this is because Pakistan imports a major chunk of its coal from Afghanistan. This coal is the initial raw material to make clinker which they later process into cement.

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Mian Mujtaba claims that the sector expected to raise the cement cost to Rs 670; however, government incentives and tax cuts allowed room to push it up to Rs 525 (from Rs 497) only. This is not valid argument to consumers and that is why they claim that the cement sector has monopolized on the government’s incentives.

What does the future hold?

However, many are optimistic for the cement sector to stabilize in 2021. Industry analysts believe that even if fiscal year 2020 shows losses, fiscal year 2021 – barring any outright surprises – should show improved numbers and better earnings for cement companies.

This prediction is supported three-fold. Firstly, the cement sector is helped significantly by lower energy costs – specifically declining re-liquefied natural gas (RLNG), coal and furnace oil prices. Secondly, the interest rate was cut significantly – by 625 basis points to 7%. Third, and most importantly, the federal government announced incentives for the cement sector in the new budget for fiscal year 2021.

A few of these are a little broad in scope; for instance, the government allocated Rs 69 billion for dams and Rs 30 billion for the Naya Pakistan Housing Scheme. Additionally, there was an increase in the limit on transactions that do not require recording the buyer’s computerized national identity card (CNIC) number; that is, from Rs 50,000 to Rs 100,000.

One whopping change was the reduction in the federal excise duty (FED) from Rs 2,000 per tonne, to Rs 1,750 per tonne. This translates into a cut of Rs 12.5 per 50kg cement bag! Yasin Hanif, analyst at Darson Securities issued a note to clients on June 18th. According to him, “the above measures will well promote a revitalization of construction activities… going forward, we expect demand to pick up once the pandemic is neutral”.