Pakistan cement sector is growing exponentially— having doubled its annual production capacity after every decade or even earlier. The fast growth was driven by both public and private sector development in infrastructure and construction activities.
In the year 1990-91 installed capacity was 8.89 million tons per year (mtpy) of cement, which was expanded to 16.41 mtpy in 1998-99. Major boom in cement demand, domestically as well as in export market, justified the industry to undertake huge expansion, though phase-wise, having registered 30.50 mtpy capacity in 2006-07 and 37.68 mtpy in the subsequent year (2007-08). Currently, Pakistan has an installed capacity of 69.64 mtpy, with 25 cement plants in operation across the country. Capacity expansion of the fastest growing industry through establishing new cement plants and upgrading existing units continues at a large scale and on fast track.
During the first eight-month period of the current financial year (July 2019-February 2020), total cement dispatches amounted to 33.31 million tons, and projected to 47 million tons for the whole year compared to 46.88 million tons sold in all of 2018-19. Given the conditions of economic stagflation, it seems to be a satisfactory performance, recording a marginal growth compared to last year.
But not so if analysed on the basis of capacity utilisation or the idle capacity available with the industry. Overall capacity utilization in 2018-19 was 78.48 percent, which reduced to 71.75 percent since production capacity has meanwhile expanded, reflecting an almost 7 percent idle capacity compared to last year. Overall idle capacity at present is over 28 percent, which is rather alarming.
In other words, output declined significantly compared to last year. Interestingly, the industry had achieved optimum 93.62 percent capacity utilisation in 1992-93. The years 1995-96 and 2004-05 had also witnessed high capacity utilisation of 92.70 percent and 91.32 percent, respectively.
Historically, the industry has been operating at an average 78 percent capacity utilisation for the past ten years. It is ironic that only five cement companies (groups), representing 80 percent of the industry’s installed capacity, have monopolized the sector.
Today, Lucky Cement is the largest cement producer with 11.71 mtpy capacity, followed by Bestway Cement of 10.32 mtpy. DG Khan Cement, Kohat Cement and Pioneer Cement are ranked third, fourth and fifth largest producers with 7.12 mtpy, 5.02 mtpy and 4.55 mtpy, respectively. The industry has always been the most favored of all the governments, having received policy concessions, fiscal benefits and export subsidies. Indeed, it has very strong lobby, also termed as a cartel by some, and determines the industry’s dynamics. It is one of the priority industry for investment having attracted inflow of major foreign direct investment (FDI).
Given the present scenario, the outlook for the industry is dubious, in the wake of major operational capacity expansion undertaken by most of the cement producers whereas a number of new cement plants are also planned in Punjab and Khyber Pakhtunkhwa (KP) involving billions of dollars investment. Punjab Minister for Industries and Trade had announced in December last year that 13 proposals for green-field projects and upgrading of one existing plant were in advanced stage of approval, including those from DG Khan Cement and Attock Cement. Earlier, in 2017, the KP government had issued 14 licenses to set up cement factories in the province.
These include key players in cement sector such as Fecto Cement, Bestway Cement, Gharibwal Cement and Askari Cement as well as new domestic and foreign investors. Fecto Cement has already obtained lease for limestone mining in Malakand District and acquired land for construction of a cement plant of 2.2 mtpy capacity.
The new cement plant is scheduled for commercial operations in 2021. Likewise, Gharibwal Cement will construct a new cement plant in Haripur. License for setting up a cement plant in KP has also been issued to British investors Asian Precious Minerals Ltd.
On the other hand, most of the cement producers have already invested heavily in expanding the respective existing plant capacity. Reportedly, eight brown-field projects had initiated few years ago expansion of combined capacity of 18.8 mtpy of which some have already commenced production at new lines while others are to be completed by end 2020.
Lucky Cement had started operations of its 2.8 mtpy upgrade plant at Pezu, KP in December 2019. Pioneer Cement has recently completed its new production line of 2.2 mtpy and its commercial production is scheduled to commence soon.
Challenges to the industry are already beginning to show. The financial statements of Pioneer Cement and Fecto Cement for half-year ending December 31, 2019 declare loss after taxation, while profit of Lucky Cement has fallen by 65 percent compared to profit earned during corresponding period of last year.
There is slow progress on projects related to the CPEC (China- Pakistan Economic Corridor), while allocations under the Public Sector Development Program (PSDP) have been inadequate---so far only 39 percent, and Prime Minister’s low-cost housing scheme has not yet taken-off. Also, new regulations for real estate sector and high interest rates have already compressed the demand of cement. The only silver-lining is in the construction of mega energy projects like Mohmand Dam and Dasu Dam & Hydroelectric project. The forecast for exports, which has been on rise in recent years, could also be affected in the wake of spread of coronavirus across the globe.
In the recent past, performance of the industry remained erratic due to a number of limiting factors and domestic demand constraints.
In the absence of a supply-demand forecast system the additional capacity expansion may not be economically viable. Thus, production capacity in cement sector is about to outstrip demand in a big way, impacting capacity utilization and resultantly its profitability. Therefore the government will be well-advised to hold on-card sanctions of new plants and ambitious plans for expansion of existing units in Punjab and KP.
The writer is former chairman of the State Engineering Corporation