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FY11 a nightmare for cement makers
July 08, 2011
The outgoing year proved to be the tough one for Pakistan cement manufacturers where not only their profitability suffered due to higher cost but dispatches also fell by 8 percent to 31.3 million tones in FY11. This negative growth was seen first time after a gap of 10 years.This decline is against earlier expectation that cement sales in Pakistan will recover after fresh demand of cement especially from the flood affected areas.
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The outgoing year proved to be the tough one for Pakistan cement manufacturers where not only their profitability suffered due to higher cost but dispatches also fell by 8 percent to 31.3 million tones in FY11. This negative growth was seen first time after a gap of 10 years.This decline is against earlier expectation that cement sales in Pakistan will recover after fresh demand of cement especially from the flood affected areas.
Thus during FY10, local cement dispatches posted a decline of 7 percent to 22 million tones. This decline was seen due to heavy monsoon floods along with halt in infrastructure spending amid government fiscal imbalances and delay in committed foreign disbursements.
On top of that, cement exports also declined by 12 percent to 9.4 million tones. “Slower construction activities along with excess cement capacities coming online in Middle East stood as the culprit”, FurqanPunjani, an analyst said.
He further said that supply disruptions caused by the floods also clamped down on cement exports from Pakistan.
With ambitious tax target and constraint on the fiscal space, it is likely that the development spending will be slashed once again in FY12 hence affecting overall cement demand in the country, he added. It is likely that cement sales to post a meager recovery of 4 percent to 32.6 million in FY12 which will be lower than last 5 year average growth of 15 percent.
Around 80 percent cement makers suffered loses in FY11, the fiscal year proved to be a nightmare for the cement sector suffered huge losses on the back of stagnant local consumption and government failed to honor its commitment for payment of inland freight subsidy that could have boosted exports, an official of All Pakistan Cement Manufactures said.
He said that cement consumption declined by 8.24 percent during the fiscal year 2010-11 as compared to the last year which has rung alarm bells for the industry and planners of the country.
Cement despatches for FY 2010-11 reveal that capacity utilization of the industry was at its lowest at 76.12 percent in past eight years with total dispatches declining by 6.68 percent to 21.97 million tones, down from 23.55 million tones in 2009-10. Low consumption of cement mirrors low growth of GDP of the economy.
He further said that continuous losses to cement industry are unbearable and might jeopardize the servicing of Rs. 132 billion in loans the industry owes to the banking sector. Cement industry has been incurring massive losses due to high cost of production, declining exports and slack local demand of the commodity but the government ignored all the issues of cement makers and no support was extended to the ailing industry, he highlighted.
According to the data for FY2010-11, the cement industry remained particularly challenged and under pressure in the northern part of the country, while the few plants operating in the south were relatively better off.
The 19 cement units in the northern region have cumulative production capacity of 36.17 million tones. These units despatched only 17.892 million tone of cement in FY2010-11 which was less than 50 percent of their installed capacity. In 2009-10 these units despatched 11.22 percent more cement amounting to 20.154 million tonse.
The total installed capacity of the 5 cement plants in the south is 6.381 million tones. These units despatched 4.083 million tons of cement in FY2010-11 which is 20 percent more than the cement despatches of 3.396 million tons, a year earlier in 2009-10.This lopsided development in different geographical regions of the country was mainly due to closeness of the plants in the south to the sea ports that enabled them to export at least some of their production. This is not feasible for the large number of mills in the north due to high transportation cost. Another point worth noting is that the domestic uptake of cement increased in Sindh (South) that offset the impact of lowered exports last fiscal. Law and order issues in the north may also have impacted adversely, sales of cement in this region.
The woes of the plants based in the north were compounded by reduction in domestic demand in northern parts of the country and inability to achieve breakthrough in land exports to India. Overall, exports declined by 11.69 percent while the total despatches of cement trimmed by 6.68 percent.
He further said that two years back government agreed to share transportation cost from mills to sea port. This, he added, boosted exports and provided some relief to the industry but it is regrettable that the promised support was never provided. Even in the current budget, there is no mention to release long-awaited inland freight subsidy of Rs 270 million to the cement makers which has added to the problems of the industry, he stated with dismay.
He recalled that the Economic Coordination Committee (ECC) and Trade Development Authority of Pakistan (TDAP) had approved inland freight subsidy on export of cement by sea. Accordingly, the government issued a public notice dated March 26, 2010 allowing inland freight subsidy at the rate of 35 percent on cement exports till June 30, 2010. On this basis, export orders were taken up by the manufacturers but the government failed to honour its pledge.
However, he thanked the government of Pakistan for reducing the Federal Excise Duty (FED) on cement by Rs 200 per ton and bringing down GST from 17 percent to 16 percent, which has reduced the worries of cement industry to some extent and consumers, would get much needed relief. It was also heartening to note that the government had provided a road map to exempt this item from levy of excise duty over the next two years which was a much needed reform and hoped it would spur activity in the construction sector.
Lastly, he hoped that government would encourage the construction of concrete roads and use of cement blocks instead of bricks which is the modern and internationally recognized method of construction.
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