Pakistan has become the major cement exporter in the region and has so far exported 6.63 million tonnes during 11 months of the current fiscal year. The cement export is 137.2 per cent higher than 2.8 million tonnes of the last fiscal year.
Major destinations of Pakistani cement are Afghanistan, the UAE and India. The reconstruction activity in Afghanistan and real estate boom in the UAE and the Gulf Cooperation Council (GCC) member countries have created cement shortage in the regional market. Cement manufacturers are also tapping other potential markets of the Middle East and the African countries. Shifting of manufacturer’s focus towards exports because of comparatively better retention prices also played a part in the growth of export.
Pakistan’s Lucky Cement has maintained its status as being the leading export market shareholder at 36 per cent in 11 months of FY08, followed by DGKC at 10 per cent. Pakistan Cement Company (PCCL) and Maple Leaf Cement Factory have appeared to be the relative gainers here in terms of increasing exposure to the export market. PCCL has increased its market share to almost 9 per cent from the 1 per cent of last year.
Local sale of cement during the 11 months of FY08 have also maintained growth of 22.9 per cent owing to the expanding local demand and growing cement shortage in the region.
The capacity utilisation has also improved to 84 per cent in 11 months of the current fiscal year from 82.4 per cent of the last year.
Analysts and stakeholders say that few factors including enhancement of excise taxation, increasing transportation costs and surging prices of coal may hamper export growth and profitability of cement manufacturers in the future.
Cement sector’s fuel and power expenses contribute 60 per cent of its cost of sales with a breakup of 41 per cent fuel and 19 per cent power. Therefore, it is the most important factor deciding the sector’s profitability where there is a local supply glut, and almost all major manufacturers have leveraged balance sheets due to their expansion plans. Analysts say that cement manufacturers can partially compensate for rising energy cost by passing it to export market.
Export revenues are also Federal Excise Duty FED and sales tax exempted while local sales are liable to sales tax of 16per cent and FED of PKR900 per ton, announced in budget for next fiscal year. However, higher freight cost to seaport is limiting the opportunity for northern zone cement manufacturers to export through sea route as northern plants bear higher transportation cost to reach the harbours. Northern zone manufacturers have to pay close to $18 per tonne as freight and handling, against southern zone manufacturers paying close to $9 per ton for the same. Cement exporters are earning close to $70 per ton on their export sales.
In the backdrop of higher crude oil prices pressure is mounting for the use of alternative fuel such as coal and natural gas. Almost all cement manufacturers are running plants on the dry process mechanism by consuming coal for heating purposes. However, coal prices skyrocketed in the international market by 136.7per cent in a year to an average $133.31 per tonne in June 2008 as compared to an average of $56.32 per tonne of June last year. Due to heavy demand for coal all over the world, especially in China and India, the price of coal has escalated like wildfire. China has almost banned coal exports since it has set up a lot of coal-based power plants.
Coal is an alternate to other fuels such as furnace oil or natural gas and that if the cement mills depended on Wapda or KESC the already alarming shortage of power in the country would become destructive for the whole country. Thus coal is vital for the country’s exports, industrial base, construction industry, and physical infrastructure. Until the domestic coal is extracted and utilised.
The mills are expanding their own capacities and at the same time there is huge demand for clinker and cement in Afghanistan, India, UAE, Iran, Qatar, Oman, Sri Lanka etc. India has targeted around 100,000 tonnes of cement from Pakistan per month but in the wake of growing demand it is expected that India would soon enhance the figure to nearly half a million tons. Analysts estimate that around eight million tonnes per annum would be exported.
However, the rising input costs on the back of sky rocketing coal prices may offset any gains to be derived from soaring exports and local sales volumes in future.
On the other hand local off takes are slowing down due to slow construction activity on the back of a hold up in Government spending amid an unsettled political climate.
Government has allocated Rs550 billion for the Public sector development program PSDP in 2008-09 budget. The budgetary allocations are likely to have positive impact on the cement sector as the move is expected to boost local sales. In the given situation the future of cement sector and the economy as whole depends solely on the political stability of the country. Presently all efforts of the government are aimed at resolving the issue of judiciary, which has emerged from the inability of the coalition government, with the less importance to the economic agenda.