A Study of Pakistani Cement Industry

GENERAL OVERVIEW

 

In the past 2 years the cement industry has been facing a crisis situation with no relief from the state and the overall industrial setup. Cement constitutes a basic ingredient for any infrastructure or socio-economic development of a nation and care must be taken to avert the crisis before it gains a strong foothold and begins to affect other areas such as the construction industry and other public development programs. It signifies the participation of the private sector in the industrial growth of the country with an investment of about Rs.70 billion and thus needs attention to maintain its pivotal role in the economic setup of the country.

The sector which contributes Rs.15-20 billion per annum to the National Exchequer, has a sufficient share in the GDP (Rs.40 billion per year) and with a shareholders equity of around Rs.30 billion, is now on the verge of collapse.[1] The industry’s market capitalization fell to Rs.3.5 billion in1998 from Rs.63 billion in 1994. During 1997-98 the cement sector had been adversely affected by the dampening effect of slowed down economy and oversupply situation but in 1999 revival began as a substantial growth in domestic consumption.

The performance outlook of the sector is very encouraging with the main factors being:

• Reduced capacity utilization
• Improvement in consumption patterns
• Reduction in indirect taxation
• Measures for price stability

The sector had experienced steady growth upto 1993-94 prompting an additional private sector investment of Rs.32 billion and addition of new capacity of 6.5 million tonnes per annum. However since 1995 onwards it has been hard hit by frequent fiscal policy changes and rapid escalation of input costs. The capacity utilization reached only 60% due to a negative trend in demand growth and the prevalent oversupply situation. This led to losses of Rs.2 billion in 1996-97.[2] Demand was falling due to the slow growth in the construction sector as drastic cuts were being applied in the annual development programs on account of resource constraints.

 

CEMENT SECTOR IN PAKISTAN

• Local Production and Consumption:

At present the total installed capacity of 28 cement plants (23 private and 5 public sector) is 17.312 million tonnes. Of these 8 are in Sind, 12 in Punjab, 5 in NWFP, 2 in Baluchistan and 1 in Islamabad.[3] The industry has experienced a steady growth rate of 8%, with 9% in the North Zone and between 4.5% and 6% in the South Zone. Until 1994 the country was facing shortages of cement and the gap was filled by imports. The shortfall in the supply coupled with a stable growth trend attracted investments in this sector, which led to an increase in capacity from 9 million tonnes in 1994 to 16 million tonnes in 1999. In 1998-99 total production of these plants was estimated at 10.384 million tonnes. In the preceding years i.e. 1997-98 and 1996-97 cement production was around 9.799 and 9.536 million tonnes respectively. [4]

In 1999 as many as 9 new cement plants were being planned or implemented, all in the private sector. Their estimated capacity will be about 9.67 million tonnes. The expansion of existing plants will further add 4.03 million tonnes to the overall capacity of the sector.[5]

 

PROVINCE	NO.OF PLANTS	CAPACITY(million tonnes)
Sind	8	3.364
Punjab	12	7.894
NWFP	5	4.351
Baluchistan	2	0.723
Islamabad	1	0.990
Total	28	17.32

(SOURCE: IRS Nov.1997)

Due to the oversupply situation in the country cement manufacturers decided to manage their production with reduced capacity utilization in the beginning of 1998, on a monthly basis. Due to production management the industry has been able to avoid negative competition and affect the prices as well.

Meanwhile, the declining trend in consumption has been arrested, in fact reversed with 5.3% growth recorded in 1998-99 over 1997-98 and the current year 1999-2000 already on the path of a growth rate in the range of 10-11%.[6] The cement industry with effective production management and improved market conditions during the year 1999-2000 is set to recover and achieve encouraging results.

The present growth trend in cement consumption indicates that by the year 2003, the demand will catch up with the supply. The surplus during 2000-2003 has a potential outlet into the large export market in neighbouring countries like Bangladesh, Sri Lanka, Yemen, Burma and others which are at 10 days’ sailing from Karachi.

Per capita cement consumption is a valuable indicator for evaluating the economic and developmental progress in a country. The per capita consumption in Pakistan is around 71kg, which is lesser than the internationally accepted standard of nearly 100kg.[7] Demand of cement also has a high correlation with the GDP, and the correlation coefficient stands at around 93%.

Demand Supply Gap(000 tonnes)

YEAR	DEMAND	SUPPLY	GAP
1996-97	10478	11823	+1345
1997-98	11421	13134	+1713
1998-99	12448	14146	+1728
1999-2000	13568	16096	+2528
2000-2001	14789	15269	+280
2001-2002	16120	18270	+2150

(SOURCE: IRS. Nov.1997)

A look at some trends:

• Feb 1998– APCMA backs price increase
• Oct 1998– Government cuts CED on cement
• Feb 1999– MCA demands a cut in prices
• Jul 1999– PM’s housing scheme expected to increase demand by 11.876 million tonnes[8]

 

 

SOUTH ZONE PLANTS

COMPANY	LOCATION	CAPACITY  (million tonnes/annum)	EFFECTIVE CAPACITY (million tonnes/annum)	REMARKS
Attock	Hub	0.756	0.756	–
Javedan	Karachi	0.630	0.315	Partially closed
Pakland	Karachi	0.945	0.787	–
Dadabhoy	Nooriabad	0.504	0.472	–
Essa	Nooriabad	0.472	0.472	–
Thatta	Thatta	0.315	0.315	–
Zeal Pak	Hyderabad	1.058	0.567	Partially closed
ACC Rohri	Rohri	0.241	–	Wetplant closed
TOTAL		4.921	3.648	–

(SOURCE: Co.report and interview)

 

The cement industry is very unevenly distributed in the country with a vast difference in capacity and production as can be seen in the above and following table. The number of plants is less than double in the south zone as compared to those in the north but total production in the latter region is nearly 3 times that in the former area. Even then all units charge the same price when in reality their technology, layout, product range and differs. This implies a misuse of cartel power exerted by the APCMA.

 

 

NORTH ZONE PLANTS

COMPANY	LOCATION	CAPACITY  (million tonnes/annum)	EFFECTIVE CAPACITY (million tonnes/annum)	REMARKS
AWT Wah	Wah	0.945	0.945	–
D.G. Khan	D.G. Khan	1.732	1.732	–
Maple Leaf	Daud Khel	1.03	1.039	Wetlines closed
Pioneer	Khushab	0.630	0.630	–
Dandot	Dandot	0.504	0	Plant closed
Fecto	Islamabad	0.630	0.630	–
Cherat	Nowshera	0.787	0.787	–
Mustahkam	Hattar	0.660	0	Plant closed
Kohat	Kohat	0.567	0.567	–
Gharibwal	Gharibwal	0.567	0.567	Wet Plant
Fauji	Taxila	0.945	0.945	–
Lucky	Pezo	1.260	1.260	–
Best Ways	Hattar	1.039	1.039	–
Askari	Nizampur	0.630	0.630	–
TOTAL		12.43	10.771	–

(SOURCE: Co.report and interview)

 

The following 2 tables will give the zonal effective capacity, percentage capacity utilization, consumption and the prevailing gaps between demand and supply in the two production zones. It shows both the actual present scenario and future estimates.

 

 

NORTH ZONE ( million tonnes)

Year	Effective Capacity	Capacity Utilization	Local Consumption	Surplus/ (Deficit)
1999-2000	10.771	75%	8.078	2.693
2000-2001	11.404	77%	8.805	2.599
2001-2002	11.404	85%	9.597	1.807
2002-2003	11.404	92%	10.461	0.943
2003-2004	11.404	100%	11.404	0
2004-2005	11.404	109%	12.429	(1.025)

(SOURCE: Performance Review by Pakland)

 

SOUTH ZONE (million tonnes)

Year	Effective Capacity	Capacity Utilization	Local Consumption	Surplus/ (Deficit)
1999-2000	3.684	75%	2.763	0.921
2000-2001	3.591	80%	2.901	0.690
2001-2002	4.158	73%	3.046	1.112
2002-2003	4.158	77%	3.200	0.958
2003-2004	4.158	80%	3.358	0.800
2004-2005	4.158	85%	3.526	0.632

(SOURCE: Performance Review by Pakland)

 

As we can see from the above tables in the South Zone the surplus supply situation is expected to continue for as long as the next 5 years. Also capacity utilization is not estimated to reach even 90% much less full capacity utilization of the plants. The question that then arises is what then is the reason for the extensive expansion projects and the setting up of new plants when existing plant capacities create an over supply situation before attaining full capacity levels of production. The reason lies in the growing export potential for cement manufacturers and all of them want to capture a sizeable share before their competitors do. The next section discusses this issue at length.

 

• Export Potential in the Industry:

The export potential available to the Pakistani cement sector can be summarized in the following table:

Countries	Current Demand 1998	Demand Growth %	Local Production (metric tonnes)	Current Gap	Est. Gap in 2003	Remarks
Bangladesh	3100	8	200	2900	4400	No limestone
Sri Lanka	2000	1	500	1500	1600	Fast depletion of limestone reserves
Myanmar	2400	8	500	1900	3000	No major capital
Yemen	2800	10	1200	1600	1000	High growth rate
TOTAL	10300		2400	7900	10000

(SOURCE: Pakland Research Report)

 

Demand though in the above countries is on the rise, potential is highly jeopardized by the high prices at which local clinker/cement is available to these importers. Further more clinker/cement is available in these countries at extremely low prices due to the South Asian crisis and the crash of currencies. On average the C&F prices in these countries have fallen by US$15 per tonne. Pakistan on the other hand is unable to export these products even at variable cost. The price offered by local producers is $80 per tonne, which is much higher than those quoted by other players in the international market.[9]

Pakistan though has an excellent opportunity to capture these markets since they offer benefits in the form of geographic proximity, and perceived high quality of Pakistani cement. Presently India and China are reaping the benefits since they are able to offer competitive prices as their costs of production is lower and state subsidies for exports are given to cement producers of these countries.

Import requirements of the countries mentioned in the above table are approximated at 17.7 million metric tonnes. Pakistani producers were of the view that they could capture around 30% of this market in 1998-99 and increase their share to 50% in the following year, that is, 1999-2000. By the year 2000 the forex earnings were estimated at US$697 million. [10]

DEMAND FOR IMPORT OF CEMENT(000 metric tonnes)

Countries	1997-98	1998-99	1999-2000
Bangladesh	2365	2485	2612
Sri Lanka	1526	1648	1719
Syria	706	792	889
Myanmar	1728	2073	2488
Lebanon	1671	1721	1722
Singapore	3926	4005	4085
Hong Kong	2405	2463	2522
Vietnam	3373	3727	4118
TOTAL	17700	18914	20205

(SOURCE: IRS Nov.1997)

In relation to the above scenario the targets set by our local producers are as follows:

 

EXPORT TARGETS OF CEMENT PRODUCERS

	1997-98	1998-99	1999-2000
Import Demand(000 tonnes)	17700	18914	20205
Target % mkt.share	30	40	50
Qty.(000 tonnes)	5310	7566	10102
C&F Prices(US$)	65	67	69
Total Export Revenue(million US$)	345	507	697

(SOURCE: IRS Nov.1997)

Apart from non-competitive prices domestic cement manufacturers face problems in the form:

 

 

• Inadequate port facilities
• Present export rebate of 12.5% of FOB i.e., Rs.300 and Rs.270 per tonne for cement and clinker respectively is very high
• Clinker/cement are not Non-Traditional Exports and therefore denied extra 50% rebate
• Export of cement allowed only via sea which eliminates cheaper road transport through Afghanistan and into Central Asia
• Lack of sufficient duty and surcharge drawbacks. Reimbursement of these duties to the exporter should be made.[11]

 

Cement export has also been negatively affected by other acts such as dumping by Chinese cement producers and high freight charges which, act as a disincentive for local exporters.  For instance freight charges from Pakistan to Dhaka are around $17 per tonne, whereas it costs the Chinese only $12 per tonne to the same destination. Rupee devaluation poses another problem for exporters in the form of changing fuel and furnace oil prices and thus increasing costs. A 5% increase in furnace oil prices leads to a 1% fall in gross margins for exporting companies. [12]

The country’s cement manufacturers can gain a strong foothold in the foreign market by competing on prices because brand image and value are not of prime consideration for cement in the international arena. Proposals offered to remedy this situation are duty drawbacks, refunding of development surcharge and freight subsidies to the tune of $180 million.[13] Pakistani cement can attract buyers only if it offers a combination of superior quality with competitive prices. Also fast action is needed to tap the vast potential available for foreign market development for the cement sector to regain its balance and revert to its former status as a well performing industry.

 

CEMENT PRODUCTION PROCESS

Pakistan is a country rich in deposits of limestone, shale and gypsum, which are the main ingredients for the production of cement. The mining costs for these deposits come to only about Rs.100 per tonne or approximately 6% of total manufacturing cost. Thus cement is an extremely “value-added” product and must be given its due importance. Types of cement include:

• Ordinary Portland Cement (OPC)
• Slag Cement
• White Cement
• Super Sulphate Resisting Cement (SSRC)
• Sulphate Resisting Cement (SRC)

The manufacturing process can be of any of the 3 types:

1. Wet Process; an obsolete method of manufacturing due to poor kiln heating and large water requirements.
2. Semi-Wet Process; not popular due to high levels of fuel and energy consumption and suited for materials with extreme elasticity. Quite obsolete.

• Dry Process; suitable for materials with low moisture content. Low fuel usage as compared to the wet process, less maintenance requirements, higher kiln efficiency due to pre- heating facility and low kiln setup and maintenance costs.

The process used has a major impact on the cost structure of the company. Using old and out-dated forms of technology not only effect the overall quality of the final product but result in higher maintenance costs, more replacement of parts etc. and the result is less competitive prices in both the domestic and foreign markets. We can see that Indian cement is sold at lesser prices since they have been able to cut back on their costs of production. This has been done by lowering energy costs via reliance on coal rather than furnace oil for running and operating their processes.

 

 

 

 

 

PROBLEMS IN THE INDUSTRY

 

1. Costing and Pricing Policies

In early 1999 the Monopoly Control Authority (MCA) issued a directive that all cement prices were to be reduced to Rs.140 per bag. The result was a disastrous drop in revenue proceeds to the government to the tune of Rs.8 billion per annum approximately.

Average Cost of Cement

Items	Rs.per bag
Raw material	4.46
Packing material	12.94
Fuel	28.59
Power	22.84
Salaries and Wages	7.25
Stores	4.15
Mfg.& Selling Overhead	7.61
Operating cost	87.84
Financial expenses	30.83
Total Cash Cost	118.67
Depreciation	20.05
Total cost per bag	138.72

(SOURCE: IRS Jan.1999)

 

The MCA decision was more than welcomed by the construction sector and the builders and developers. This was done to boost the growth in the construction sector, which had been showing a declining trend as per a 1-2% growth rate between the period 1993-1999.[14] The privatization strategy was used as a reason for the hike in prices by the cement manufacturers and they after profit retail price as Rs.228.5 in 1998, whereas just a year earlier in1997 the same was said to be Rs.170 per bag. The APCMA asserts that the rise in the prices of inputs such as furnace oil and the additional surcharge on electricity justifies for an increment in the final prices. Furnace oil prices rose by 112% in 1997 as the government decided to annex furnace oil prices to international oil prices such that they came to about Rs.6297 in 1997 from Rs.3900 in 1995. But when the price of furnace oil in the international markets fell to $12 from $20 the local prices were not adjusted to accommodate this change. At present furnace oil prices should fall in the range of Rs.3000 per tonne in Pakistan. Thus, furnace oil is available locally at double the prices in the foreign markets. In turn, the average impact of the rise in furnace oil prices works out to be around Rs.17 per bag. [15]

Electricity charges were escalating due to the additional surcharges levied on them. These were about Rs.1.82 per kwh in 1992-93 and rose by 107% to Rs.3.76 in 1997-98. Since around 85% of the total manufacturing cost consist of fuel and power, rise in this cost element leads to cost-push inflation in the form of higher retail prices.[16]

Even at the rate of Rs.230 per bag in 1999 the industry was losing Rs.12 per bag. In addition to this cement producers pay around 40% of their retail price in the form of excise duty leaving a retention price of only Rs.100 per bag as compared to a cost of Rs.138 per bag.[17] The following diagram shows the trend in prices in the previous 4 years.

 

In addition to the above, prices of other materials has also led to the justification of producers for increasing their final prices. One of these reasons is nearly a 79% increase in paper bag prices due to the devaluation of the rupee. This increment led to the rise in packing costs and a further addition to total cost.

 

The principle of competition in the market economy states that a depressed market leads to lower prices but we see that this is not the case in the cement sector. A decline in demand is having a reverse effect. [18]

  

 

2. Taxation Policy:

The taxation policy should have ensured lower prices since cement is an essential commodity for the development of an economy. The industry in Pakistan is paying Rs.90 per bag as excise duty as compared to Indian producers who pay only Rs.17.50 per bag. If the excise duty rates are revised to Rs.300 per tonne then the price of domestic cement can be reduced to as low as Rs.160 per bag. Inordinate and frequent increases in taxes create a dilemma for local cement manufacturers since they have to appreciate their prices every now and then, adding to the lack of stability in the form of fluctuating prices. This has led to a reduction in the demand for cement. The rates of excise duty have been escalating at the tremendous rate of 350% in the last 10 years and 200% in the previous 5 years. This is the reason per capita consumption of cement in Pakistan is as low as 71kg.Import of machinery for expansion was exempt from duties until 1995 after which 10% regulatory duty was imposed on all imported goods. This led to arise in the capital cost of new plants and on-going projects. Apart from excise duty the sector adds to the state revenue in the form of:

• Provincial royalties on limestone, gypsum etc.
• Import duties on spares and parts
• Octroi on all items purchased
• Excise duty on all raw materials

The rapid escalation in excise duties has transformed the sector to a loss making industry from one that was earning around 35% profit margin previously.

The proposal now is to charge the levy as a combination of excise, sales tax with adjustment margins for the same taxes paid on oil, power and materials. In lieu of this recommendation the government has reduced the excise duty to Rs.1400 per tonne as compared to the past trend of a fixed 40% of retail price.

Exports too are being affected by fickle state policies. Low duty drawback of only Rs.600 per tonne reduces the level of exports. The reduction in excise duties should help local producers lower and maintain their prices at around Rs.200 per bag.

 

 

 

 

 

3. Declining Profitability and Market Capitalization:

Since 1995 the cement sector has been in trouble. In 1993-94 the sector’s profits were well above Rs.2 billion but they reduced to half the amount in the following year. Companies in this industry, from 1995-96, were incurring losses onwards. On top of this the overall market capitalization witnessed a severe decline from Rs.62 billion in 1994 to Rs.3.486 billion in 1998. The following table shows the actual and forecasted profits in the 2 regional divisions of the cement sector:

North Zone(Rs.000)	1999(A)	2000	2001	2002	2003	2004	2005
Profit/(Loss)	(1748950)	496295	1433159	2384390	3350130	4341778	5368633
Mkt.Cap.	4706643	6158841	21110427	35122058	49347412	63954388	79079965
South Zone(Rs.000)	1999(A)	2000	2001	2002	2003	2004	2005
Profit/(Loss)	(151884)	669181	850720	1034403	1221006	1411380	1606466
Mkt.Cap.	692243	1030523	12531104	15236756	17985417	20789622	23663250

(SOURCE: Performance Review by Pakland)

Most cement companies are incurring heavy losses due to the fact that the retail price after excise and other taxes leaves an amount not even able to cover their production costs much less give them space for profit margins. 4 public limited companies were forced to close down since their losses had reached a level they were unable to account for. The losses suffered by some of the companies in the 6 months ended December 1998 are as follows:

Company	Operating Losses(in millions)
D.G. Khan Cement	371
Maple Leaf	366
Pioneer Cement	132
Zeal Pak	104

 

 

 

 

 

 

An adverse development has been the fall in EPS of all companies in this sector. The maximum EPS in the period 1996-98 was Rs.3.45 and the mean was only Rs.1.17 as compared to 1993-95 when the figures were Rs.17.23 and Rs.7.46 respectively. A 17% decrease in sales has aggravated the financial status of all companies. Total sector profits fell from Rs.484 million in 1995-96 to a loss of Rs.2836 million in 1997-98. In the 6 months period of 1998-99 the industry stated losses of Rs.2.786 billion.[19] Lower sales with additional taxes on retail price lead to lower revenues and lower operating profits. Subtraction of high financial charges on liabilities results in extremely low or in most cases negative net income. Shareholders have suffered losses worth Rs.60 billion since 1994 in share value. Companies thus have negative EPS as well and are unable to declare and pay out dividends to shareholders. The earnings track record for Cherat, Fecto, Dadabhoy, Pakland, Maple leaf, Lucky, Gharibwal, Fauji, DG.Khan, Kohat, Mustehkam, Pioneer and Zeal Pak, combined is as follows:

 

Particulars	1992	1993	1994	1995	1996	1997	1998
No. of shares	1261386	1919900	2494973	3171973	5442378	9661393	11265535
Mkt. Capitalization 000	5911401	9289327	35000000	15838617	8104575	9552352	5048560
After-tax profit(loss)000	367518	1252390	1480390	1270099	458727	(1298138)	(1766737)
Avg.MP/share	47	48	140	50	15	10	4
EPS	2.91	6.52	5.93	4	0.84	(13.40)	(15.68)

(SOURCE: Pakland Research Report)

 

As we can see the trend has been very inconsistent. The reasons are the problems mentioned and most of all the lack of foresight on the part of all cement manufacturers. They have been unable to gauge the trends in a manner to take preventative actions and now are at a loss for remedial measures as well because the crisis has deepened an the issues just keep piling up.

 

 

 

4. Debt Servicing:

The financial crisis in the industry has led to a severe liquidity crunch in this sector. The debt burden comprises of $300 million owed to international agencies and around Rs.20 billion debt is outstanding in relation to the local banks and DFI’s. Financial charges have been on the rise ever since 1992 when they amounted to only Rs.428 million, while in 1998 the same amount had risen to Rs.1595 million.[20] Cement manufacturers are in a fix as to what to do to remedy the situation. One option available to them is liquidation and 4 of the companies had to eventually resort to this. Fauji Cement, D.G.Khan Cement, Pioneer and AC Wah are nearing a default situation on their debt servicing on loans obtained from foreign institutions such as International Finance Corp. and Commonwealth Development Corp. total credit liabilities of the sector towards local banks is to the tune of Rs.23.881 billion. Details are as follows:

COMPANY	LOANS(Rs.million)
Pioneer	1450.35
DG.Khan	312.36
Cherat	284.95
Fecto	215.86
Maple Leaf	2919.45
Javedan	388
Dadabhoy	296.5
Essa	225.32
Kohat	444.26
Slag	20.77
Zeal Pak	33.81
Dandot	83.74
Lucky	136.34
Pakland	603
Fauji	617.29

(SOURCE: IRS Feb.1999)

Companies have been unable to pay interest due on loans, owe payment to utility companies like WAPDA and KESC. Depletion of stocks of furnace oil and paper bags for packaging and defaults in payments to suppliers adds to their burden bringing them nearer to the edge. Late payment of bills will lead to an additional loss in the form of 10% surcharge.[21] Suppliers on the other hand will demand immediate payment with the due penalties to avoid a complete default by the manufacturers. Low stocks of paper bags will delay dispatches of orders and tarnish the goodwill developed with the consumers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. Increasing Capital Cost of Plants:

The cement industry is a capital-intensive industry with heavy reliance on the engineering sector of the economy. In addition to this, the manufacturers depend on technology, which is usually imported when setting up a new plant or considering expansion. So far European and American plants are being set up in the country. The cost of a 2000-tpd plant lies within the range of Rs.3.5-4 billion and for a 3000-tpd plant the capital cost is approximately Rs.5.5-6 billion.  This large capital outlay is increasing financial charges.

70% of the plants in Pakistan have been supplied by a Danish firm named FL Smidth. Japan and Germany have sold only 2 plants here. The situation now is such that FLS is now a price- making monopolist who is causing a steady upward trend in the price of its plants. All the new 15 plants being set up have been sold to us by FLS except those of Saadi Cement and Kaiser Cement. Due to persistent devaluation plants which cost Rs.35-80 million in 1993 are now in the range of Rs. 3-6 billion. This hinders expansion plans and adoption of latest technology by the new and existing plants.

Capital Cost Comparison of New Projects

Particulars	Pakland 2	Saadi	D.G	Maple	Fauji	Galadari
Capacity(TPA)	750000	1200000	1000000	1000000	945000	630000
Nature of Project	Expansion	Green Field	Expansion	Expansion	Green Field	Green Field
Capital Cost(Rs.mn)	2800	4800	6643	6275	5715	4130
Origin of Plant	European	European	European	European	European	European
Rs./ton of ann.capacity	3733	4000	6643	6275	6048	6556

(SOURCE: Pakland Research Report)

With the costs of FLS plants on the rise, a few plants have been bought from the Chinese who have adopted this technology via franchise but are offering lower prices as compared to their Western competitors. The drawback is that they are offering only very small capacity plants such as those producing 300-2000 tonnes per day.[22]

 

 

Proposals for Improvement in Present Scenario

• Reduce surplus situation by exports
• Lower tax rates, enhance duty drawbacks and import subsidies
• Increase state protection and eliminate the problem of dumping
• Zero-rating for excise and other retail taxes
• Freight equalization of Rs.300 per tonne to bring manufacturers in both zones at par
• Establish bulk loading and storage facilities at the port and develop a dry port
• Government should reschedule debt to reduce loss burden
• Producers be given gas for fuel instead of high-priced furnace oil to reduce input costs
• Reduce surcharge on electricity and bring furnace oil prices at the same level as international prices
• Proposed duty drawback is as understated:

PACKING MATERIAL

No. of bags per ton of cement	22 bags
No. of bags produced per ton of Kraft paper	3000 bags
C&F of Sack Kraft paper @ US $ 750	Rs.33.233($=44.31)
Custom duty @ 25%	8.475
Regulatory duty @ 5%	1.475
Excise duty @ 5%	1.662
Sales tax @ 12.5%	5.629
Duty drawback on Imported bags	5.81 per bag
Local excise duty @ 5%	0.53 per bag
Local sales tax @ 2.5%	1.39 per bag
Duty drawback on bags per ton of cement	7.73 per bag

(SOURCE: PAGE, Apr27-May3)

 

 

 

FURNACE OIL

Furnace oil for 1 ton of cement	157 Kgs
6.36 tonnes of cement from 1 ton of oil
Import and Excise duty	Rs.35.2 per tonne
Development Surcharge	Rs. 3620.9 per tonne
Duty drawback on furnace oil per ton of cement	574.87

(SOURCE: PAGE, Apr27-May3)

 

 

FUTURE PROSPECTS

• The liberalization policy Pakistan is so eager to adopt will work both for and against the local industries. Unrestricted trade will allow free entry of low priced cement into the country and reduce existing market shares of all domestic players.
• Growing emphasis on low prices may reduce the qualitative aspect of production and give way to inferior products. Companies have to maintain quality standards and at the same time try and reduce costs via economies of scale.
• Too much expansion by a few players will lead to the development of a monopolistic environment in the sector. At present the industry is oligopolistic in market structure with a few sellers in the market who compete on the basis of price and technology and resort to means to increase their relative shares in the market.
• The wet process technology is outdated and all manufacturers using this method will stay far behind if they do not take measures to improve and update their production facilities.
• Focus in the future will be on cost competitiveness and product differentiation so that producers of cement can enhance margins and increase earnings by capturing a wider market base. Players specializing in different varieties can develop to various market segments and increase customer base.

 

 

COMPANY PROFILES

 

PAKLAND CEMENT

“COMMITTED TO EXCELLENCE”; this is the statement that defines the management of the company. With this mission the company has moved on and grown since its inception in 1976. It had started off as a trading and land development firm and has then diversified into various areas of business of which its cement portfolio has earned it the name it has today. At present Pakland is in the business of trading, housing and manufacturing with its hand full with production and marketing of:

• Cement
• Fertilizer
• Paper
• Viscose
• Polymers
• Power generation

The dynamism and progress of Pakland is attributable to its corporate philisophy which revolves around its above mentioned motto. It is this commitment to excellence that has led to impressive achievements, some of which are impressive by any yardstick of management performance.

 

 

Goals and Objectives:

Pakland is a goal-oriented organization. It is their corporate belief that the organization must have clear, unambiguos goals that stretch both the management and the individuals. Once these challenging goals have been defined then the process of implementation is set in motion. They are the most important and crucial element in the organization. Their belief is that the only worthy goals are those that blend the interests of the individual, company and community. Intellect is not allowed to overpower wisdom and analysis does not impede actions. Things are kept simple yet efficient to strike the right balance between sophistication and rationale.

At Pakland it is believed that the most important objective is not profit but to offer quality to the community which satisfies a desirable need efficiently and economically. The product offered should be of high quality yet affordable to a large segment of the market. Every endeavour and action of the company is geared toward the attainment of this underlying objective. They are aware of the fact that they are here to serve the community and that the complete satisfaction of all stakeholders is a win-win remedy that solves all other problems due to its long-term impact.

The company is continuously striving to retain and attract new markets and customers. This is being done via product and market development and on-going improvements in process, plant and technology. [23]

 

 

 

Highlights:

Pakland cement is Pakistan’s first private sector cement plant to go into production. It was incorporated in 1980 with the objective of establishing a 1000 metric tonnes per day capacity ordinary Portland cement plant at Dhabeji, about 60 km from Karachi.

The project at the time was worth Rs.700 million. After successful trial production in February 1985 the company announced commercial production on 1 July 1985.

• Technology

The process design chosen is of latest technology based on suspension pre-heater type of dry process system. The company has one dry process unit as well. A high degree of automation has been incorporated in the production line and thus the process is highly capital intensive. An advance system enables monitoring and control of the entire process from a single station, by means of visual display in the central control room. Quality control is an in-built system with inspection at every stage of the process to ensure optimum output with least level of rejection.

• Modernization and Expansion

In 1995 a massive expansion program was undertaken to increase the capacity to 5000 tonnes per day. It was achieved through optimization of existing production line and addition of new unit. The capital cost of this plan was in the region of Rs.2600 million.

• Equity and Share Capital

The company was listed in 1989 with a share capital of Rs.200 million, with its market capitalization crossing the Rs.1500 million mark in 1995 when share capital grew to Rs.825 million.[24

Expansion Plans:

After completion of its under implementation projects Pakland shall have a total installed capacity of 2.9 million tonnes per annum comprising 4 manufacturing lines summarized below:

PAKLAND 1:

The original plant was based on single string 4 stage pre- heater, with a capacity of 1100 tonnes per day (TPD). It was designed and supplied by Creusot Loire of France. Holder Bank were engaged as consultants for vetting of process design, raw material investigation and quarry planning for 50 years’ requirements.

In 1986 the plant was added with second string 5 stage pre- heater, and an offline precalciner with tertiary air duct designed by IHI of Japan, to enhance the plant capacity to 1800 TPD. The plant has successfully operated over the years with an average 550000 TPD production.

In 1998-99 the plant has been further enhanced to 3000 TPD by additions/ modifications of various plant sections in line with optimization program designed by IHI.

PAKLAND 2:

In 1994-95 Pakland Cement initiated capacity expansion project by installation of a new line parallel to its existing facilities. The process technology was from UZINEXPORTIMPORT, Romania and the equipment from USA, Romania and Japan.The Pyroprocess is based on Onoda’s RSP technology. The plant is designed to produce 2400TPD clinker. The expansion project is presently under implementation with civil work almost completed and 75% of the equipment delivered to Pakistan. In addition to this the Pakland expansion at Karachi is basically export based with a capacity of 0.788 million tonnes per annum.

SAADI CEMENT:[25]

Saadi cement is located in NWFP, about 60 km from Islamabad. Due to its proximity to the federal capital and to the main consuming centers the plant enjoys an ideal location. Rated capacity of the project is 1.5 million tonnes per annum. The project is using the same technology that is being used in Pakland 2 and the sources of machinery and equipment is also the same. It will produce gray portland cement.

 

Expected daily production is 3000 tonnes. The whole project has a capital cost of Rs. 3.2 billion. Pakland has invested Rs.800 million in the equity of Saadi Cement.

The plant and equipment includes raw material crusher, raw milling and homogenizing equipment, suspension pre-heater, kiln and clinker cooler, cement milling and gypsum proportioning equipment, electrostatic precipitator, and dust collecting equipment. The total cost of the imported equipment is approximately US$ 27.22 million including $406800 for supervisory and advisory services. Saadi cement is located in an area which enjoys exemption from payment of duties and taxes on imported equipment and sales tax on product sales upto the year 2001. The new investment policy allowed zero-rated tariff on imported machinery and a 90% tax allowance on the cost of plant, machinery and equipment. This was done since the cement sector was in the category of Value- added or Export industry.  The area also is in close proximity to sites of all the raw materials needed in the production process. The raw materials are available in quantities sufficient to last for a 100 years.

Based on the exemptions mentioned above such a large amount of investment was mobilized in NWFP. The financial feasibility and finances were arranged accordingly on the basis of cash flows keeping in mind the exemptions from sales and income tax.

The government in contradiction to the Economic Reforms withdrew these exemptions with no protection to under implementation projects.

 

 

 

Key Financial Data:

The following table provides other relevant data in a more concise and comprehensive manner. Gross amounts are in million of rupees, capacity and production in millions of tonnes per year and ratios in times or percentages.

 

KEY INFORMATION

Particulars	1997	1998
Net Sales(Rs.mn)	844.19	922.29
Gross Profit(Rs.mn)	133.44	72.50
Operating Profit(Rs.mn)	74.19	25.57
Fin.Charges(Rs.mn)	120.34	71.17
Net Profit(Rs.mn)	21.15	(38.06)
Paid-up Capital(Rs.mn)	825	825
Assets(Rs.mn)	4765.8	5272.17
Liabilities(Rs.mn)	3544.71	4089.13
No. of shareholders	1309	1537
No. of Shares	NA	82500000
Installed Capacity(mn.tonnes)	390000	390000
Capacity Utilization(mn.tonnes)	471245	420209
Capacity Util.(%)	120.83	107.75
Market Share(%)	NA	7.5

(SOURCE: Annual Reports + VIS 1999)

 

 

 

 

 

Opportunities and Threats:

• The Pakland Group, which is the sponsor of Saadi Cement, is planning to enter the export market to tap the huge potential a available in this area of business. For this purpose the group has been given permission to construct its own jetty at Port Qasim. The construction of this private jetty will involve costs worth Rs.250 million.
• The present C&F prices prevailing in Bangladesh, Sri Lanka and other target export markets is US $ 39 per tonne. The average freight from Karachi to Chittagong is $ 16. Based on these parameters and added with duty drawback of Rs.900 per tonne allowed by the government on cement export, the cash margin available to Pakland is:

 

Particulars	Price/Cost($ per tonne)
C&F price	39
Less Sea Freight	(16)
FOB	23
Less Inland Cost	(6)
Ex-Factory	17
Pak.Rs @(Rs.52=$1)	884
Add Duty Drawback	900
Net Retention	1784
Less Direct Mfg. Cost	(1200)
Contribution Margin	584

(SOURCE: Pakland Research Report)

• The contribution margin earned with exports will help in offsetting the local fall in net retention due to increase in input costs and assist the company overcome losses with additional revenues.
• Due to a well-developed brand name market development is not a problem for Pakland.the company’s products command premium prices in the market. The price per tonne keeps fluctuating but recently Pakland was charging approx. Rs. 3200-3600 per tonne for its cement.
• By achieving quality standards set by the BSS the company can easily pursue the ISO 9002 certificate to add to its strengths.
• Pakland faces threats in the form of govt. regulations, increase in duties and lack of sufficient protection and incentives to explore the export market. In addition to this constant rise in input and energy prices and the prevailing oversupply situation create problems for the company since it has undertaken massive expansion plans.
• The company’s overdue debt can be a major obstacle for the implementation of some of the plans mentioned above.

 

 

 

 

 

 

Competition:

The top 5 companies in the industry in relation to market share are:

COMPANY	MKT.SHARE(%)
Cherat	10.59
DG Khan	10.08
Fecto	8.94
Lucky	8.21
Dadabhoy	8.14

(SOURCE: Financial Analysis Report by Company)

Pakland considers Lucky, DG Khan and Maple Leaf as its main competitors in the whole sector. Maple Leaf is Pakland’s major competitor with respect to market share. The latter has a share of 7.53% as compared to Pakland’s 7.5%.

 

Top Cement Cos. According To Sales(in Rs.mn)

Company	1998	1997	1996
Fauji	1401	–	–
DG Khan	1045	1347	1368
Cherat	1302	1496	1368
Pioneer	–	1212	1271
Fecto	1098	1298	1280
Dadabhoy	1000	755	1270

(SOURCE: IRS Jan.1999)

As far as sales and profitability is concerned Pakland is at the bottom when compared to its competitors but is the only company showing a positive sales growth trend. In addition to this it has the lowest GP margin when compared to its immediate competitors.

 

SALES AND PROFITABILITY COMPARISON

Company	Sales(Rs.mn)	Sales Growth(%)	GP Margin(%)
Pakland	922.291	9.3	13.4
Lucky	1010.006	15.7	19.3
DG Khan	1238.983	-8.1	23.1
Maple Leaf	925.646	-8.7	22.1

(SOURCE: KSE, WI Carr and Corporateinfo.com)

 

 

Marketing Overview:

Like the industry as a whole, the company too is in the maturity stage and quite close to decline if actions are not taken in time to reverse the present decelerating trend in the sector. The slow market growth trend has weakened the company’s status as a growing concern. But with its expansion plans nearing completion and ability to explore the foreign market with its exports, the company has a strong competitive edge over the other players in the industry.

Participative management allows the company to remain flexible in a very volatile and unstable industry. The company is proactive and welcomes all feasible and beneficial changes quite easily. In an industry where price wars do not result in a lot the company eliminates competition via prudent financial management with the consecutive achievement of lower costs through economies of scale.

 

 

Company Information:

Board of Directors

Tariq Mohsin Siddiqui (CEO and Chairman)

Shamim Mushtaq Siddiqui

Mohd. Salim Arif

Mohd. Aqueel Abbasi

Jameel Ahmed Siddiqui

Sadaf Khan

Razi-ur-Rehman Khan

 

Company Secretary

Mohd. Adil

 

Major Shareholders

Categories	Number	Shares Held	%
Individuals	1545	57201173	69.33
Joint Stock Cos.	8	1513521	1.83
Investment Cos.	6	16235210	19.68
Insurance Cos.	1	825000	1
Financial Institutions	1	268125	0.33
Modaraba Cos.	4	1053750	1.28
Foreign Cos.	22	5403221	6.55

(SOURCE: Annual report 1998)

 

 

 

 

 

 

 

 

 

DADABHOY CEMENT

The Dadabhoy group has businesses in the areas of energy, sacks, construction and trading apart from cement. They are proud to be the only Pakistani plant in the country as compared to their counterparts who have bought plants from international plant producers. The cement sector was entered in 1978 when the group decided to set up a 1000 TPD plant for the production of ordinary portland cement.

The technology the company uses is the dry process. The plant is situated in Nooriabad, Sind and commercial production began in 1986. At the time since demand outpaced supply, the company went for optimization and increased plant capacity to 1500 TPD.

The company was listed on the Stock exchange in 1992 with a paid-up capital of Rs. 265.79 million.

Its line of products includes:

• Slag cement
• Portland cement
• Sulphate resistant cement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goals and Objectives:

The company believes in quality as the only driver toward success. It strives hard to give consumers products which are upto and beyond their expectations.

Continuous optimization is undertaken to keep the technology and production process at its best. The company strives hard to maintain its quality standards and keep customers satisfied. The company’s pursuance of its goal led to the attainment of the ISO 9002 certification for compliance with international quality standards. The certificate is ample proof of the fact that customers will get a product worth the price they pay and that the company will maintain its criteria for quality and continuous improvement. A company so keen on giving all its customers a worthy product, is bound to develop immeasurable goodwill and carve a niche for itself in the market. Quality attracts customers and the company does not have to waste much time and effort in winning customers over via tedious marketing techniques.

 

Future Plans:

Rapid socio-economic revival is necessary to remove the sector’s sluggish growth trend. The company like the others in the sector wants state protection and reduction in input costs to gain an edge in the international market and compete with competitors offering low prices. Due to the slump in the market the production in 1998-99 was reduced to 374.376 million tonnes as compared to 547 million tonnes in the preceding financial year.

The company has expanded its capacity to 1800-2000 TPD to achieve economies of scale and reduce costs. As such the company does not intend to engage in any large –scale expansion projects.

 

 

 

 

 

 

 

 

 

 

Key Financial Data:

Particulars	1998	1999
Net Sales(Rs.mn)	1000.36	703.145
Gross Profit(Rs.mn)	137.45	81.83
Operating Profit(Rs.mn)	96.86	24.81
Fin.Charges(Rs.mn)	76.87	19.32
Net Profit(Rs.mn)	13.99	1.697
Paid-up Capital(Rs.mn)	398.69	398.69
Assets(Rs.mn)	2010.316	1918.926
Liabilities(Rs.mn)	1605.856	1512.77
No. of shareholders	4891	4971
No. of Shares	NA	39868800
Installed Capacity(mn.tonnes)	409500	409500
Capacity Utilization(mn.tonnes)	547054	374376
Capacity Util.(%)	133.59	91.42
Market Share(%)	8.14	NA

(SOURCE: Annual Reports + VIS 1999)

 

Sales were reduced by 32% in the current financial year due to the escalation of furnace oil prices. Still, the company managed to earn a profit of Rs.1.697 million. The reason for the fall in profits is that the increment in manufacturing cost could not be passed on to the consumers since there is cut throat competition in this oligopolistic industry where price enhancements lead to loss of customers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Opportunities and Threats:

• The company is planning to enter the Furnace Blast cement product area. This type is used for seaports etc. and has a high export and revenue potential. At present the company is involved in a legal battle with the NDFC regarding the repayment of all long term loans due to the institution and the present sums in the Balance Sheet being the interest and mark-up on those loans.
• The company can use its increased daily production facility as an advantage and try and enter the international market like the rest of the firms in the industry. It can gain a strong footing in the export area since it has a relative cost advantage due to prevalent economies of scale and the availability of latest technology.
• The reduction in sales and thus profits is having a deep impact on the overall liquidity position of the company and the profit margins as well.
• Remedial measures need to be taken to deal with the fall in sales revenue and margins.
• Since the company is one of the largest in the sector in addition to being renowned it will have no problem in differentiating and developing new products to widen its product and customer base. Latest products include oil-well cement, furnace blast cement, low alkali cement and rapid hardening cement. These types are quite common in international markets and local companies to enhance exports must offer the latest products.[26]

 

 

 

 

 

 

 

 

 

 

 

 

Company Information:

Board of Directors:

Mohd. Hussain Dadabhoy (chairman)

Razia Hussain Dadabhoy

Humaira Dadabhoy

Mohd. Amin Dadabhoy (CEO)

Yasmeen Dadabhoy

Fazal K. Dadabhoy

Naseemuddin

 

Company Secretary:

Nayyer Karim

 

Major Shareholders:

Categories	Number	Shares	%
Individuals	4942	10309110	25.86
Joint stock cos.	4	21492890	53.91
Fin. & Invest. Cos.	25	8066800	20.23
Total	4971	39868800	100

(SOURCE: Annual report 1999)

 

[1] Page Sept.7-13,1998

[2] Page,Sept.7-13, 1998

[3] IRS, Dec.1998

[4] Pakland report + IRS Dec. 1998

[5] IRS, Dec. 1998

[6] Pakland Report

[7] Page, Sept.7-13, 1998

[8] InvesCap Research, 1999

[9] Page, Sept. 1998

[10] IRS, Nov. 1997

[11] IRS, Feb. 1999

[12] IRS, Feb. 1999+ IRS,Nov, 1997

[13] IRS Feb. 1999 + Pakland Report

[14] Dawn, EBR,Feb.21-27,2000

[15] IRS, Jan. 1999

[16] IRS, Feb. 1999

[17] IRS, Jan. 1999

[18] Page, Sept.7-13, 1998

[19] IRS Feb. 1999

[20] VIS 1999

[21] Page, Sept. 1998 + Page Mar.15-21, 1999

[22] IRS, Feb.1999

[23] Pakland Brochure + Interview

[24] Annual reports + Interview + Co. Performance Review

[25] Pakland Research Report + IRS Nov. 1997

[26] Interview With Dy. Mgr. Mktg.

GENERAL OVERVIEW

 

In the past 2 years the cement industry has been facing a crisis situation with no relief from the state and the overall industrial setup. Cement constitutes a basic ingredient for any infrastructure or socio-economic development of a nation and care must be taken to avert the crisis before it gains a strong foothold and begins to affect other areas such as the construction industry and other public development programs. It signifies the participation of the private sector in the industrial growth of the country with an investment of about Rs.70 billion and thus needs attention to maintain its pivotal role in the economic setup of the country.

The sector which contributes Rs.15-20 billion per annum to the National Exchequer, has a sufficient share in the GDP (Rs.40 billion per year) and with a shareholders equity of around Rs.30 billion, is now on the verge of collapse.[1] The industry’s market capitalization fell to Rs.3.5 billion in1998 from Rs.63 billion in 1994. During 1997-98 the cement sector had been adversely affected by the dampening effect of slowed down economy and oversupply situation but in 1999 revival began as a substantial growth in domestic consumption.

The performance outlook of the sector is very encouraging with the main factors being:

• Reduced capacity utilization
• Improvement in consumption patterns
• Reduction in indirect taxation
• Measures for price stability

The sector had experienced steady growth upto 1993-94 prompting an additional private sector investment of Rs.32 billion and addition of new capacity of 6.5 million tonnes per annum. However since 1995 onwards it has been hard hit by frequent fiscal policy changes and rapid escalation of input costs. The capacity utilization reached only 60% due to a negative trend in demand growth and the prevalent oversupply situation. This led to losses of Rs.2 billion in 1996-97.[2] Demand was falling due to the slow growth in the construction sector as drastic cuts were being applied in the annual development programs on account of resource constraints.

 

CEMENT SECTOR IN PAKISTAN

• Local Production and Consumption:

At present the total installed capacity of 28 cement plants (23 private and 5 public sector) is 17.312 million tonnes. Of these 8 are in Sind, 12 in Punjab, 5 in NWFP, 2 in Baluchistan and 1 in Islamabad.[3] The industry has experienced a steady growth rate of 8%, with 9% in the North Zone and between 4.5% and 6% in the South Zone. Until 1994 the country was facing shortages of cement and the gap was filled by imports. The shortfall in the supply coupled with a stable growth trend attracted investments in this sector, which led to an increase in capacity from 9 million tonnes in 1994 to 16 million tonnes in 1999. In 1998-99 total production of these plants was estimated at 10.384 million tonnes. In the preceding years i.e. 1997-98 and 1996-97 cement production was around 9.799 and 9.536 million tonnes respectively. [4]

In 1999 as many as 9 new cement plants were being planned or implemented, all in the private sector. Their estimated capacity will be about 9.67 million tonnes. The expansion of existing plants will further add 4.03 million tonnes to the overall capacity of the sector.[5]

 

PROVINCE	NO.OF PLANTS	CAPACITY(million tonnes)
Sind	8	3.364
Punjab	12	7.894
NWFP	5	4.351
Baluchistan	2	0.723
Islamabad	1	0.990
Total	28	17.32

(SOURCE: IRS Nov.1997)

Due to the oversupply situation in the country cement manufacturers decided to manage their production with reduced capacity utilization in the beginning of 1998, on a monthly basis. Due to production management the industry has been able to avoid negative competition and affect the prices as well.

Meanwhile, the declining trend in consumption has been arrested, in fact reversed with 5.3% growth recorded in 1998-99 over 1997-98 and the current year 1999-2000 already on the path of a growth rate in the range of 10-11%.[6] The cement industry with effective production management and improved market conditions during the year 1999-2000 is set to recover and achieve encouraging results.

The present growth trend in cement consumption indicates that by the year 2003, the demand will catch up with the supply. The surplus during 2000-2003 has a potential outlet into the large export market in neighbouring countries like Bangladesh, Sri Lanka, Yemen, Burma and others which are at 10 days’ sailing from Karachi.

Per capita cement consumption is a valuable indicator for evaluating the economic and developmental progress in a country. The per capita consumption in Pakistan is around 71kg, which is lesser than the internationally accepted standard of nearly 100kg.[7] Demand of cement also has a high correlation with the GDP, and the correlation coefficient stands at around 93%.

Demand Supply Gap(000 tonnes)

YEAR	DEMAND	SUPPLY	GAP
1996-97	10478	11823	+1345
1997-98	11421	13134	+1713
1998-99	12448	14146	+1728
1999-2000	13568	16096	+2528
2000-2001	14789	15269	+280
2001-2002	16120	18270	+2150

(SOURCE: IRS. Nov.1997)

A look at some trends:

• Feb 1998– APCMA backs price increase
• Oct 1998– Government cuts CED on cement
• Feb 1999– MCA demands a cut in prices
• Jul 1999– PM’s housing scheme expected to increase demand by 11.876 million tonnes[8]

 

 

SOUTH ZONE PLANTS

COMPANY	LOCATION	CAPACITY  (million tonnes/annum)	EFFECTIVE CAPACITY (million tonnes/annum)	REMARKS
Attock	Hub	0.756	0.756	–
Javedan	Karachi	0.630	0.315	Partially closed
Pakland	Karachi	0.945	0.787	–
Dadabhoy	Nooriabad	0.504	0.472	–
Essa	Nooriabad	0.472	0.472	–
Thatta	Thatta	0.315	0.315	–
Zeal Pak	Hyderabad	1.058	0.567	Partially closed
ACC Rohri	Rohri	0.241	–	Wetplant closed
TOTAL		4.921	3.648	–

(SOURCE: Co.report and interview)

 

The cement industry is very unevenly distributed in the country with a vast difference in capacity and production as can be seen in the above and following table. The number of plants is less than double in the south zone as compared to those in the north but total production in the latter region is nearly 3 times that in the former area. Even then all units charge the same price when in reality their technology, layout, product range and efficiency differs. This implies a misuse of cartel power exerted by the APCMA.

 

 

 

 

 

 

NORTH ZONE PLANTS

COMPANY	LOCATION	CAPACITY  (million tonnes/annum)	EFFECTIVE CAPACITY (million tonnes/annum)	REMARKS
AWT Wah	Wah	0.945	0.945	–
D.G. Khan	D.G. Khan	1.732	1.732	–
Maple Leaf	Daud Khel	1.03	1.039	Wetlines closed
Pioneer	Khushab	0.630	0.630	–
Dandot	Dandot	0.504	0	Plant closed
Fecto	Islamabad	0.630	0.630	–
Cherat	Nowshera	0.787	0.787	–
Mustahkam	Hattar	0.660	0	Plant closed
Kohat	Kohat	0.567	0.567	–
Gharibwal	Gharibwal	0.567	0.567	Wet Plant
Fauji	Taxila	0.945	0.945	–
Lucky	Pezo	1.260	1.260	–
Best Ways	Hattar	1.039	1.039	–
Askari	Nizampur	0.630	0.630	–
TOTAL		12.43	10.771	–

(SOURCE: Co.report and interview)

 

The following 2 tables will give the zonal effective capacity, percentage capacity utilization, consumption and the prevailing gaps between demand and supply in the two production zones. It shows both the actual present scenario and future estimates.

 

 

NORTH ZONE ( million tonnes)

Year	Effective Capacity	Capacity Utilization	Local Consumption	Surplus/ (Deficit)
1999-2000	10.771	75%	8.078	2.693
2000-2001	11.404	77%	8.805	2.599
2001-2002	11.404	85%	9.597	1.807
2002-2003	11.404	92%	10.461	0.943
2003-2004	11.404	100%	11.404	0
2004-2005	11.404	109%	12.429	(1.025)

(SOURCE: Performance Review by Pakland)

 

SOUTH ZONE (million tonnes)

Year	Effective Capacity	Capacity Utilization	Local Consumption	Surplus/ (Deficit)
1999-2000	3.684	75%	2.763	0.921
2000-2001	3.591	80%	2.901	0.690
2001-2002	4.158	73%	3.046	1.112
2002-2003	4.158	77%	3.200	0.958
2003-2004	4.158	80%	3.358	0.800
2004-2005	4.158	85%	3.526	0.632

(SOURCE: Performance Review by Pakland)

 

As we can see from the above tables in the South Zone the surplus supply situation is expected to continue for as long as the next 5 years. Also capacity utilization is not estimated to reach even 90% much less full capacity utilization of the plants. The question that then arises is what then is the reason for the extensive expansion projects and the setting up of new plants when existing plant capacities create an over supply situation before attaining full capacity levels of production. The reason lies in the growing export potential for cement manufacturers and all of them want to capture a sizeable share before their competitors do. The next section discusses this issue at length.

 

• Export Potential in the Industry:

The export potential available to the Pakistani cement sector can be summarized in the following table:

Countries	Current Demand 1998	Demand Growth %	Local Production (metric tonnes)	Current Gap	Est. Gap in 2003	Remarks
Bangladesh	3100	8	200	2900	4400	No limestone
Sri Lanka	2000	1	500	1500	1600	Fast depletion of limestone reserves
Myanmar	2400	8	500	1900	3000	No major capital
Yemen	2800	10	1200	1600	1000	High growth rate
TOTAL	10300		2400	7900	10000

(SOURCE: Pakland Research Report)

 

Demand though in the above countries is on the rise, potential is highly jeopardized by the high prices at which local clinker/cement is available to these importers. Further more clinker/cement is available in these countries at extremely low prices due to the South Asian crisis and the crash of currencies. On average the C&F prices in these countries have fallen by US$15 per tonne. Pakistan on the other hand is unable to export these products even at variable cost. The price offered by local producers is $80 per tonne, which is much higher than those quoted by other players in the international market.[9]

Pakistan though has an excellent opportunity to capture these markets since they offer benefits in the form of geographic proximity, and perceived high quality of Pakistani cement. Presently India and China are reaping the benefits since they are able to offer competitive prices as their costs of production is lower and state subsidies for exports are given to cement producers of these countries.

Import requirements of the countries mentioned in the above table are approximated at 17.7 million metric tonnes. Pakistani producers were of the view that they could capture around 30% of this market in 1998-99 and increase their share to 50% in the following year, that is, 1999-2000. By the year 2000 the forex earnings were estimated at US$697 million. [10]

DEMAND FOR IMPORT OF CEMENT(000 metric tonnes)

Countries	1997-98	1998-99	1999-2000
Bangladesh	2365	2485	2612
Sri Lanka	1526	1648	1719
Syria	706	792	889
Myanmar	1728	2073	2488
Lebanon	1671	1721	1722
Singapore	3926	4005	4085
Hong Kong	2405	2463	2522
Vietnam	3373	3727	4118
TOTAL	17700	18914	20205

(SOURCE: IRS Nov.1997)

In relation to the above scenario the targets set by our local producers are as follows:

 

EXPORT TARGETS OF CEMENT PRODUCERS

	1997-98	1998-99	1999-2000
Import Demand(000 tonnes)	17700	18914	20205
Target % mkt.share	30	40	50
Qty.(000 tonnes)	5310	7566	10102
C&F Prices(US$)	65	67	69
Total Export Revenue(million US$)	345	507	697

(SOURCE: IRS Nov.1997)

Apart from non-competitive prices domestic cement manufacturers face problems in the form:

 

 

• Inadequate port facilities
• Present export rebate of 12.5% of FOB i.e., Rs.300 and Rs.270 per tonne for cement and clinker respectively is very high
• Clinker/cement are not Non-Traditional Exports and therefore denied extra 50% rebate
• Export of cement allowed only via sea which eliminates cheaper road transport through Afghanistan and into Central Asia
• Lack of sufficient duty and surcharge drawbacks. Reimbursement of these duties to the exporter should be made.[11]

 

Cement export has also been negatively affected by other acts such as dumping by Chinese cement producers and high freight charges which, act as a disincentive for local exporters.  For instance freight charges from Pakistan to Dhaka are around $17 per tonne, whereas it costs the Chinese only $12 per tonne to the same destination. Rupee devaluation poses another problem for exporters in the form of changing fuel and furnace oil prices and thus increasing costs. A 5% increase in furnace oil prices leads to a 1% fall in gross margins for exporting companies. [12]

The country’s cement manufacturers can gain a strong foothold in the foreign market by competing on prices because brand image and value are not of prime consideration for cement in the international arena. Proposals offered to remedy this situation are duty drawbacks, refunding of development surcharge and freight subsidies to the tune of $180 million.[13] Pakistani cement can attract buyers only if it offers a combination of superior quality with competitive prices. Also fast action is needed to tap the vast potential available for foreign market development for the cement sector to regain its balance and revert to its former status as a well performing industry.

 

 

 

 

 

 

 

CEMENT PRODUCTION PROCESS

Pakistan is a country rich in deposits of limestone, shale and gypsum, which are the main ingredients for the production of cement. The mining costs for these deposits come to only about Rs.100 per tonne or approximately 6% of total manufacturing cost. Thus cement is an extremely “value-added” product and must be given its due importance. Types of cement include:

• Ordinary Portland Cement (OPC)
• Slag Cement
• White Cement
• Super Sulphate Resisting Cement (SSRC)
• Sulphate Resisting Cement (SRC)

The manufacturing process can be of any of the 3 types:

1. Wet Process; an obsolete method of manufacturing due to poor kiln heating and large water requirements.
2. Semi-Wet Process; not popular due to high levels of fuel and energy consumption and suited for materials with extreme elasticity. Quite obsolete.

• Dry Process; suitable for materials with low moisture content. Low fuel usage as compared to the wet process, less maintenance requirements, higher kiln efficiency due to pre- heating facility and low kiln setup and maintenance costs.

The process used has a major impact on the cost structure of the company. Using old and out-dated forms of technology not only effect the overall quality of the final product but result in higher maintenance costs, more replacement of parts etc. and the result is less competitive prices in both the domestic and foreign markets. We can see that Indian cement is sold at lesser prices since they have been able to cut back on their costs of production. This has been done by lowering energy costs via reliance on coal rather than furnace oil for running and operating their processes.

 

 

 

 

 

PROBLEMS IN THE INDUSTRY

 

1. Costing and Pricing Policies

In early 1999 the Monopoly Control Authority (MCA) issued a directive that all cement prices were to be reduced to Rs.140 per bag. The result was a disastrous drop in revenue proceeds to the government to the tune of Rs.8 billion per annum approximately.

Average Cost of Cement

Items	Rs.per bag
Raw material	4.46
Packing material	12.94
Fuel	28.59
Power	22.84
Salaries and Wages	7.25
Stores	4.15
Mfg.& Selling Overhead	7.61
Operating cost	87.84
Financial expenses	30.83
Total Cash Cost	118.67
Depreciation	20.05
Total cost per bag	138.72

(SOURCE: IRS Jan.1999)

 

The MCA decision was more than welcomed by the construction sector and the builders and developers. This was done to boost the growth in the construction sector, which had been showing a declining trend as per a 1-2% growth rate between the period 1993-1999.[14] The privatization strategy was used as a reason for the hike in prices by the cement manufacturers and they after profit retail price as Rs.228.5 in 1998, whereas just a year earlier in1997 the same was said to be Rs.170 per bag. The APCMA asserts that the rise in the prices of inputs such as furnace oil and the additional surcharge on electricity justifies for an increment in the final prices. Furnace oil prices rose by 112% in 1997 as the government decided to annex furnace oil prices to international oil prices such that they came to about Rs.6297 in 1997 from Rs.3900 in 1995. But when the price of furnace oil in the international markets fell to $12 from $20 the local prices were not adjusted to accommodate this change. At present furnace oil prices should fall in the range of Rs.3000 per tonne in Pakistan. Thus, furnace oil is available locally at double the prices in the foreign markets. In turn, the average impact of the rise in furnace oil prices works out to be around Rs.17 per bag. [15]

Electricity charges were escalating due to the additional surcharges levied on them. These were about Rs.1.82 per kwh in 1992-93 and rose by 107% to Rs.3.76 in 1997-98. Since around 85% of the total manufacturing cost consist of fuel and power, rise in this cost element leads to cost-push inflation in the form of higher retail prices.[16]

Even at the rate of Rs.230 per bag in 1999 the industry was losing Rs.12 per bag. In addition to this cement producers pay around 40% of their retail price in the form of excise duty leaving a retention price of only Rs.100 per bag as compared to a cost of Rs.138 per bag.[17] The following diagram shows the trend in prices in the previous 4 years.

 

In addition to the above, prices of other materials has also led to the justification of producers for increasing their final prices. One of these reasons is nearly a 79% increase in paper bag prices due to the devaluation of the rupee. This increment led to the rise in packing costs and a further addition to total cost.

 

The principle of competition in the market economy states that a depressed market leads to lower prices but we see that this is not the case in the cement sector. A decline in demand is having a reverse effect. [18]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. Taxation Policy:

The taxation policy should have ensured lower prices since cement is an essential commodity for the development of an economy. The industry in Pakistan is paying Rs.90 per bag as excise duty as compared to Indian producers who pay only Rs.17.50 per bag. If the excise duty rates are revised to Rs.300 per tonne then the price of domestic cement can be reduced to as low as Rs.160 per bag. Inordinate and frequent increases in taxes create a dilemma for local cement manufacturers since they have to appreciate their prices every now and then, adding to the lack of stability in the form of fluctuating prices. This has led to a reduction in the demand for cement. The rates of excise duty have been escalating at the tremendous rate of 350% in the last 10 years and 200% in the previous 5 years. This is the reason per capita consumption of cement in Pakistan is as low as 71kg.Import of machinery for expansion was exempt from duties until 1995 after which 10% regulatory duty was imposed on all imported goods. This led to arise in the capital cost of new plants and on-going projects. Apart from excise duty the sector adds to the state revenue in the form of:

• Provincial royalties on limestone, gypsum etc.
• Import duties on spares and parts
• Octroi on all items purchased
• Excise duty on all raw materials

The rapid escalation in excise duties has transformed the sector to a loss making industry from one that was earning around 35% profit margin previously.

The proposal now is to charge the levy as a combination of excise, sales tax with adjustment margins for the same taxes paid on oil, power and materials. In lieu of this recommendation the government has reduced the excise duty to Rs.1400 per tonne as compared to the past trend of a fixed 40% of retail price.

Exports too are being affected by fickle state policies. Low duty drawback of only Rs.600 per tonne reduces the level of exports. The reduction in excise duties should help local producers lower and maintain their prices at around Rs.200 per bag.

 

 

 

 

 

3. Declining Profitability and Market Capitalization:

Since 1995 the cement sector has been in trouble. In 1993-94 the sector’s profits were well above Rs.2 billion but they reduced to half the amount in the following year. Companies in this industry, from 1995-96, were incurring losses onwards. On top of this the overall market capitalization witnessed a severe decline from Rs.62 billion in 1994 to Rs.3.486 billion in 1998. The following table shows the actual and forecasted profits in the 2 regional divisions of the cement sector:

North Zone(Rs.000)	1999(A)	2000	2001	2002	2003	2004	2005
Profit/(Loss)	(1748950)	496295	1433159	2384390	3350130	4341778	5368633
Mkt.Cap.	4706643	6158841	21110427	35122058	49347412	63954388	79079965
South Zone(Rs.000)	1999(A)	2000	2001	2002	2003	2004	2005
Profit/(Loss)	(151884)	669181	850720	1034403	1221006	1411380	1606466
Mkt.Cap.	692243	1030523	12531104	15236756	17985417	20789622	23663250

(SOURCE: Performance Review by Pakland)

Most cement companies are incurring heavy losses due to the fact that the retail price after excise and other taxes leaves an amount not even able to cover their production costs much less give them space for profit margins. 4 public limited companies were forced to close down since their losses had reached a level they were unable to account for. The losses suffered by some of the companies in the 6 months ended December 1998 are as follows:

Company	Operating Losses(in millions)
D.G. Khan Cement	371
Maple Leaf	366
Pioneer Cement	132
Zeal Pak	104

 

 

 

 

 

 

An adverse development has been the fall in EPS of all companies in this sector. The maximum EPS in the period 1996-98 was Rs.3.45 and the mean was only Rs.1.17 as compared to 1993-95 when the figures were Rs.17.23 and Rs.7.46 respectively. A 17% decrease in sales has aggravated the financial status of all companies. Total sector profits fell from Rs.484 million in 1995-96 to a loss of Rs.2836 million in 1997-98. In the 6 months period of 1998-99 the industry stated losses of Rs.2.786 billion.[19] Lower sales with additional taxes on retail price lead to lower revenues and lower operating profits. Subtraction of high financial charges on liabilities results in extremely low or in most cases negative net income. Shareholders have suffered losses worth Rs.60 billion since 1994 in share value. Companies thus have negative EPS as well and are unable to declare and pay out dividends to shareholders. The earnings track record for Cherat, Fecto, Dadabhoy, Pakland, Maple leaf, Lucky, Gharibwal, Fauji, DG.Khan, Kohat, Mustehkam, Pioneer and Zeal Pak, combined is as follows:

 

Particulars	1992	1993	1994	1995	1996	1997	1998
No. of shares	1261386	1919900	2494973	3171973	5442378	9661393	11265535
Mkt. Capitalization 000	5911401	9289327	35000000	15838617	8104575	9552352	5048560
After-tax profit(loss)000	367518	1252390	1480390	1270099	458727	(1298138)	(1766737)
Avg.MP/share	47	48	140	50	15	10	4
EPS	2.91	6.52	5.93	4	0.84	(13.40)	(15.68)

(SOURCE: Pakland Research Report)

 

As we can see the trend has been very inconsistent. The reasons are the problems mentioned and most of all the lack of foresight on the part of all cement manufacturers. They have been unable to gauge the trends in a manner to take preventative actions and now are at a loss for remedial measures as well because the crisis has deepened an the issues just keep piling up.

 

 

 

4. Debt Servicing:

The financial crisis in the industry has led to a severe liquidity crunch in this sector. The debt burden comprises of $300 million owed to international agencies and around Rs.20 billion debt is outstanding in relation to the local banks and DFI’s. Financial charges have been on the rise ever since 1992 when they amounted to only Rs.428 million, while in 1998 the same amount had risen to Rs.1595 million.[20] Cement manufacturers are in a fix as to what to do to remedy the situation. One option available to them is liquidation and 4 of the companies had to eventually resort to this. Fauji Cement, D.G.Khan Cement, Pioneer and AC Wah are nearing a default situation on their debt servicing on loans obtained from foreign institutions such as International Finance Corp. and Commonwealth Development Corp. total credit liabilities of the sector towards local banks is to the tune of Rs.23.881 billion. Details are as follows:

COMPANY	LOANS(Rs.million)
Pioneer	1450.35
DG.Khan	312.36
Cherat	284.95
Fecto	215.86
Maple Leaf	2919.45
Javedan	388
Dadabhoy	296.5
Essa	225.32
Kohat	444.26
Slag	20.77
Zeal Pak	33.81
Dandot	83.74
Lucky	136.34
Pakland	603
Fauji	617.29

(SOURCE: IRS Feb.1999)

Companies have been unable to pay interest due on loans, owe payment to utility companies like WAPDA and KESC. Depletion of stocks of furnace oil and paper bags for packaging and defaults in payments to suppliers adds to their burden bringing them nearer to the edge. Late payment of bills will lead to an additional loss in the form of 10% surcharge.[21] Suppliers on the other hand will demand immediate payment with the due penalties to avoid a complete default by the manufacturers. Low stocks of paper bags will delay dispatches of orders and tarnish the goodwill developed with the consumers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. Increasing Capital Cost of Plants:

The cement industry is a capital-intensive industry with heavy reliance on the engineering sector of the economy. In addition to this, the manufacturers depend on technology, which is usually imported when setting up a new plant or considering expansion. So far European and American plants are being set up in the country. The cost of a 2000-tpd plant lies within the range of Rs.3.5-4 billion and for a 3000-tpd plant the capital cost is approximately Rs.5.5-6 billion.  This large capital outlay is increasing financial charges.

70% of the plants in Pakistan have been supplied by a Danish firm named FL Smidth. Japan and Germany have sold only 2 plants here. The situation now is such that FLS is now a price- making monopolist who is causing a steady upward trend in the price of its plants. All the new 15 plants being set up have been sold to us by FLS except those of Saadi Cement and Kaiser Cement. Due to persistent devaluation plants which cost Rs.35-80 million in 1993 are now in the range of Rs. 3-6 billion. This hinders expansion plans and adoption of latest technology by the new and existing plants.

Capital Cost Comparison of New Projects

Particulars	Pakland 2	Saadi	D.G	Maple	Fauji	Galadari
Capacity(TPA)	750000	1200000	1000000	1000000	945000	630000
Nature of Project	Expansion	Green Field	Expansion	Expansion	Green Field	Green Field
Capital Cost(Rs.mn)	2800	4800	6643	6275	5715	4130
Origin of Plant	European	European	European	European	European	European
Rs./ton of ann.capacity	3733	4000	6643	6275	6048	6556

(SOURCE: Pakland Research Report)

With the costs of FLS plants on the rise, a few plants have been bought from the Chinese who have adopted this technology via franchise but are offering lower prices as compared to their Western competitors. The drawback is that they are offering only very small capacity plants such as those producing 300-2000 tonnes per day.[22]

 

 

Proposals for Improvement in Present Scenario

• Reduce surplus situation by exports
• Lower tax rates, enhance duty drawbacks and import subsidies
• Increase state protection and eliminate the problem of dumping
• Zero-rating for excise and other retail taxes
• Freight equalization of Rs.300 per tonne to bring manufacturers in both zones at par
• Establish bulk loading and storage facilities at the port and develop a dry port
• Government should reschedule debt to reduce loss burden
• Producers be given gas for fuel instead of high-priced furnace oil to reduce input costs
• Reduce surcharge on electricity and bring furnace oil prices at the same level as international prices
• Proposed duty drawback is as understated:

PACKING MATERIAL

No. of bags per ton of cement	22 bags
No. of bags produced per ton of Kraft paper	3000 bags
C&F of Sack Kraft paper @ US $ 750	Rs.33.233($=44.31)
Custom duty @ 25%	8.475
Regulatory duty @ 5%	1.475
Excise duty @ 5%	1.662
Sales tax @ 12.5%	5.629
Duty drawback on Imported bags	5.81 per bag
Local excise duty @ 5%	0.53 per bag
Local sales tax @ 2.5%	1.39 per bag
Duty drawback on bags per ton of cement	7.73 per bag

(SOURCE: PAGE, Apr27-May3)

 

 

 

 

 

 

FURNACE OIL

Furnace oil for 1 ton of cement	157 Kgs
6.36 tonnes of cement from 1 ton of oil
Import and Excise duty	Rs.35.2 per tonne
Development Surcharge	Rs. 3620.9 per tonne
Duty drawback on furnace oil per ton of cement	574.87

(SOURCE: PAGE, Apr27-May3)

 

 

FUTURE PROSPECTS

• The liberalization policy Pakistan is so eager to adopt will work both for and against the local industries. Unrestricted trade will allow free entry of low priced cement into the country and reduce existing market shares of all domestic players.
• Growing emphasis on low prices may reduce the qualitative aspect of production and give way to inferior products. Companies have to maintain quality standards and at the same time try and reduce costs via economies of scale.
• Too much expansion by a few players will lead to the development of a monopolistic environment in the sector. At present the industry is oligopolistic in market structure with a few sellers in the market who compete on the basis of price and technology and resort to means to increase their relative shares in the market.
• The wet process technology is outdated and all manufacturers using this method will stay far behind if they do not take measures to improve and update their production facilities.
• Focus in the future will be on cost competitiveness and product differentiation so that producers of cement can enhance margins and increase earnings by capturing a wider market base. Players specializing in different varieties can develop to various market segments and increase customer base.

 

 

COMPANY PROFILES

 

PAKLAND CEMENT

“COMMITTED TO EXCELLENCE”; this is the statement that defines the management of the company. With this mission the company has moved on and grown since its inception in 1976. It had started off as a trading and land development firm and has then diversified into various areas of business of which its cement portfolio has earned it the name it has today. At present Pakland is in the business of trading, housing and manufacturing with its hand full with production and marketing of:

• Cement
• Fertilizer
• Paper
• Viscose
• Polymers
• Power generation

The dynamism and progress of Pakland is attributable to its corporate philisophy which revolves around its above mentioned motto. It is this commitment to excellence that has led to impressive achievements, some of which are impressive by any yardstick of management performance.

 

 

 

 

 

 

 

 

 

 

 

 

Goals and Objectives:

Pakland is a goal-oriented organization. It is their corporate belief that the organization must have clear, unambiguos goals that stretch both the management and the individuals. Once these challenging goals have been defined then the process of implementation is set in motion. They are the most important and crucial element in the organization. Their belief is that the only worthy goals are those that blend the interests of the individual, company and community. Intellect is not allowed to overpower wisdom and analysis does not impede actions. Things are kept simple yet efficient to strike the right balance between sophistication and rationale.

At Pakland it is believed that the most important objective is not profit but to offer quality to the community which satisfies a desirable need efficiently and economically. The product offered should be of high quality yet affordable to a large segment of the market. Every endeavour and action of the company is geared toward the attainment of this underlying objective. They are aware of the fact that they are here to serve the community and that the complete satisfaction of all stakeholders is a win-win remedy that solves all other problems due to its long-term impact.

The company is continuously striving to retain and attract new markets and customers. This is being done via product and market development and on-going improvements in process, plant and technology. [23]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Highlights:

Pakland cement is Pakistan’s first private sector cement plant to go into production. It was incorporated in 1980 with the objective of establishing a 1000 metric tonnes per day capacity ordinary Portland cement plant at Dhabeji, about 60 km from Karachi.

The project at the time was worth Rs.700 million. After successful trial production in February 1985 the company announced commercial production on 1 July 1985.

• Technology

The process design chosen is of latest technology based on suspension pre-heater type of dry process system. The company has one dry process unit as well. A high degree of automation has been incorporated in the production line and thus the process is highly capital intensive. An advance system enables monitoring and control of the entire process from a single station, by means of visual display in the central control room. Quality control is an in-built system with inspection at every stage of the process to ensure optimum output with least level of rejection.

• Modernization and Expansion

In 1995 a massive expansion program was undertaken to increase the capacity to 5000 tonnes per day. It was achieved through optimization of existing production line and addition of new unit. The capital cost of this plan was in the region of Rs.2600 million.

• Equity and Share Capital

The company was listed in 1989 with a share capital of Rs.200 million, with its market capitalization crossing the Rs.1500 million mark in 1995 when share capital grew to Rs.825 million.[24]

 

 

 

 

 

 

 

 

 

Expansion Plans:

After completion of its under implementation projects Pakland shall have a total installed capacity of 2.9 million tonnes per annum comprising 4 manufacturing lines summarized below:

PAKLAND 1:

The original plant was based on single string 4 stage pre- heater, with a capacity of 1100 tonnes per day (TPD). It was designed and supplied by Creusot Loire of France. Holder Bank were engaged as consultants for vetting of process design, raw material investigation and quarry planning for 50 years’ requirements.

In 1986 the plant was added with second string 5 stage pre- heater, and an offline precalciner with tertiary air duct designed by IHI of Japan, to enhance the plant capacity to 1800 TPD. The plant has successfully operated over the years with an average 550000 TPD production.

In 1998-99 the plant has been further enhanced to 3000 TPD by additions/ modifications of various plant sections in line with optimization program designed by IHI.

PAKLAND 2:

In 1994-95 Pakland Cement initiated capacity expansion project by installation of a new line parallel to its existing facilities. The process technology was from UZINEXPORTIMPORT, Romania and the equipment from USA, Romania and Japan.The Pyroprocess is based on Onoda’s RSP technology. The plant is designed to produce 2400TPD clinker. The expansion project is presently under implementation with civil work almost completed and 75% of the equipment delivered to Pakistan. In addition to this the Pakland expansion at Karachi is basically export based with a capacity of 0.788 million tonnes per annum.

SAADI CEMENT:[25]

Saadi cement is located in NWFP, about 60 km from Islamabad. Due to its proximity to the federal capital and to the main consuming centers the plant enjoys an ideal location. Rated capacity of the project is 1.5 million tonnes per annum. The project is using the same technology that is being used in Pakland 2 and the sources of machinery and equipment is also the same. It will produce gray portland cement.

 

Expected daily production is 3000 tonnes. The whole project has a capital cost of Rs. 3.2 billion. Pakland has invested Rs.800 million in the equity of Saadi Cement.

The plant and equipment includes raw material crusher, raw milling and homogenizing equipment, suspension pre-heater, kiln and clinker cooler, cement milling and gypsum proportioning equipment, electrostatic precipitator, and dust collecting equipment. The total cost of the imported equipment is approximately US$ 27.22 million including $406800 for supervisory and advisory services. Saadi cement is located in an area which enjoys exemption from payment of duties and taxes on imported equipment and sales tax on product sales upto the year 2001. The new investment policy allowed zero-rated tariff on imported machinery and a 90% tax allowance on the cost of plant, machinery and equipment. This was done since the cement sector was in the category of Value- added or Export industry.  The area also is in close proximity to sites of all the raw materials needed in the production process. The raw materials are available in quantities sufficient to last for a 100 years.

Based on the exemptions mentioned above such a large amount of investment was mobilized in NWFP. The financial feasibility and finances were arranged accordingly on the basis of cash flows keeping in mind the exemptions from sales and income tax.

The government in contradiction to the Economic Reforms withdrew these exemptions with no protection to under implementation projects.

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Financial Data:

The following table provides other relevant data in a more concise and comprehensive manner. Gross amounts are in million of rupees, capacity and production in millions of tonnes per year and ratios in times or percentages.

 

KEY INFORMATION

Particulars	1997	1998
Net Sales(Rs.mn)	844.19	922.29
Gross Profit(Rs.mn)	133.44	72.50
Operating Profit(Rs.mn)	74.19	25.57
Fin.Charges(Rs.mn)	120.34	71.17
Net Profit(Rs.mn)	21.15	(38.06)
Paid-up Capital(Rs.mn)	825	825
Assets(Rs.mn)	4765.8	5272.17
Liabilities(Rs.mn)	3544.71	4089.13
No. of shareholders	1309	1537
No. of Shares	NA	82500000
Installed Capacity(mn.tonnes)	390000	390000
Capacity Utilization(mn.tonnes)	471245	420209
Capacity Util.(%)	120.83	107.75
Market Share(%)	NA	7.5

(SOURCE: Annual Reports + VIS 1999)

 

 

 

 

 

 

 

 

 

 

 

Opportunities and Threats:

• The Pakland Group, which is the sponsor of Saadi Cement, is planning to enter the export market to tap the huge potential a available in this area of business. For this purpose the group has been given permission to construct its own jetty at Port Qasim. The construction of this private jetty will involve costs worth Rs.250 million.
• The present C&F prices prevailing in Bangladesh, Sri Lanka and other target export markets is US $ 39 per tonne. The average freight from Karachi to Chittagong is $ 16. Based on these parameters and added with duty drawback of Rs.900 per tonne allowed by the government on cement export, the cash margin available to Pakland is:

 

Particulars	Price/Cost($ per tonne)
C&F price	39
Less Sea Freight	(16)
FOB	23
Less Inland Cost	(6)
Ex-Factory	17
Pak.Rs @(Rs.52=$1)	884
Add Duty Drawback	900
Net Retention	1784
Less Direct Mfg. Cost	(1200)
Contribution Margin	584

(SOURCE: Pakland Research Report)

• The contribution margin earned with exports will help in offsetting the local fall in net retention due to increase in input costs and assist the company overcome losses with additional revenues.
• Due to a well-developed brand name market development is not a problem for Pakland.the company’s products command premium prices in the market. The price per tonne keeps fluctuating but recently Pakland was charging approx. Rs. 3200-3600 per tonne for its cement.
• By achieving quality standards set by the BSS the company can easily pursue the ISO 9002 certificate to add to its strengths.
• Pakland faces threats in the form of govt. regulations, increase in duties and lack of sufficient protection and incentives to explore the export market. In addition to this constant rise in input and energy prices and the prevailing oversupply situation create problems for the company since it has undertaken massive expansion plans.
• The company’s overdue debt can be a major obstacle for the implementation of some of the plans mentioned above.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Competition:

The top 5 companies in the industry in relation to market share are:

COMPANY	MKT.SHARE(%)
Cherat	10.59
DG Khan	10.08
Fecto	8.94
Lucky	8.21
Dadabhoy	8.14

(SOURCE: Financial Analysis Report by Company)

 

Pakland considers Lucky, DG Khan and Maple Leaf as its main competitors in the whole sector. Maple Leaf is Pakland’s major competitor with respect to market share. The latter has a share of 7.53% as compared to Pakland’s 7.5%.

 

Top Cement Cos. According To Sales(in Rs.mn)

Company	1998	1997	1996
Fauji	1401	–	–
DG Khan	1045	1347	1368
Cherat	1302	1496	1368
Pioneer	–	1212	1271
Fecto	1098	1298	1280
Dadabhoy	1000	755	1270

(SOURCE: IRS Jan.1999)

As far as sales and profitability is concerned Pakland is at the bottom when compared to its competitors but is the only company showing a positive sales growth trend. In addition to this it has the lowest GP margin when compared to its immediate competitors.

 

SALES AND PROFITABILITY COMPARISON

Company	Sales(Rs.mn)	Sales Growth(%)	GP Margin(%)
Pakland	922.291	9.3	13.4
Lucky	1010.006	15.7	19.3
DG Khan	1238.983	-8.1	23.1
Maple Leaf	925.646	-8.7	22.1

(SOURCE: KSE, WI Carr and Corporateinfo.com)

 

 

 

Marketing Overview:

Like the industry as a whole, the company too is in the maturity stage and quite close to decline if actions are not taken in time to reverse the present decelerating trend in the sector. The slow market growth trend has weakened the company’s status as a growing concern. But with its expansion plans nearing completion and ability to explore the foreign market with its exports, the company has a strong competitive edge over the other players in the industry.

Participative management allows the company to remain flexible in a very volatile and unstable industry. The company is proactive and welcomes all feasible and beneficial changes quite easily. In an industry where price wars do not result in a lot the company eliminates competition via prudent financial management with the consecutive achievement of lower costs through economies of scale.

 

 

 

 

 

 

Company Information:

Board of Directors

Tariq Mohsin Siddiqui (CEO and Chairman)

Shamim Mushtaq Siddiqui

Mohd. Salim Arif

Mohd. Aqueel Abbasi

Jameel Ahmed Siddiqui

Sadaf Khan

Razi-ur-Rehman Khan

 

Company Secretary

Mohd. Adil

 

Major Shareholders

Categories	Number	Shares Held	%
Individuals	1545	57201173	69.33
Joint Stock Cos.	8	1513521	1.83
Investment Cos.	6	16235210	19.68
Insurance Cos.	1	825000	1
Financial Institutions	1	268125	0.33
Modaraba Cos.	4	1053750	1.28
Foreign Cos.	22	5403221	6.55

(SOURCE: Annual report 1998)

 

 

 

 

 

 

 

 

 

DADABHOY CEMENT

The Dadabhoy group has businesses in the areas of energy, sacks, construction and trading apart from cement. They are proud to be the only Pakistani plant in the country as compared to their counterparts who have bought plants from international plant producers. The cement sector was entered in 1978 when the group decided to set up a 1000 TPD plant for the production of ordinary portland cement.

The technology the company uses is the dry process. The plant is situated in Nooriabad, Sind and commercial production began in 1986. At the time since demand outpaced supply, the company went for optimization and increased plant capacity to 1500 TPD.

The company was listed on the Stock exchange in 1992 with a paid-up capital of Rs. 265.79 million.

Its line of products includes:

• Slag cement
• Portland cement
• Sulphate resistant cement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goals and Objectives:

The company believes in quality as the only driver toward success. It strives hard to give consumers products which are upto and beyond their expectations.

Continuous optimization is undertaken to keep the technology and production process at its best. The company strives hard to maintain its quality standards and keep customers satisfied. The company’s pursuance of its goal led to the attainment of the ISO 9002 certification for compliance with international quality standards. The certificate is ample proof of the fact that customers will get a product worth the price they pay and that the company will maintain its criteria for quality and continuous improvement. A company so keen on giving all its customers a worthy product, is bound to develop immeasurable goodwill and carve a niche for itself in the market. Quality attracts customers and the company does not have to waste much time and effort in winning customers over via tedious marketing techniques.

 

Future Plans:

Rapid socio-economic revival is necessary to remove the sector’s sluggish growth trend. The company like the others in the sector wants state protection and reduction in input costs to gain an edge in the international market and compete with competitors offering low prices. Due to the slump in the market the production in 1998-99 was reduced to 374.376 million tonnes as compared to 547 million tonnes in the preceding financial year.

The company has expanded its capacity to 1800-2000 TPD to achieve economies of scale and reduce costs. As such the company does not intend to engage in any large –scale expansion projects.

 

 

 

 

 

 

 

 

 

 

Key Financial Data:

Particulars	1998	1999
Net Sales(Rs.mn)	1000.36	703.145
Gross Profit(Rs.mn)	137.45	81.83
Operating Profit(Rs.mn)	96.86	24.81
Fin.Charges(Rs.mn)	76.87	19.32
Net Profit(Rs.mn)	13.99	1.697
Paid-up Capital(Rs.mn)	398.69	398.69
Assets(Rs.mn)	2010.316	1918.926
Liabilities(Rs.mn)	1605.856	1512.77
No. of shareholders	4891	4971
No. of Shares	NA	39868800
Installed Capacity(mn.tonnes)	409500	409500
Capacity Utilization(mn.tonnes)	547054	374376
Capacity Util.(%)	133.59	91.42
Market Share(%)	8.14	NA

(SOURCE: Annual Reports + VIS 1999)

 

Sales were reduced by 32% in the current financial year due to the escalation of furnace oil prices. Still, the company managed to earn a profit of Rs.1.697 million. The reason for the fall in profits is that the increment in manufacturing cost could not be passed on to the consumers since there is cut throat competition in this oligopolistic industry where price enhancements lead to loss of customers.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Opportunities and Threats:

• The company is planning to enter the Furnace Blast cement product area. This type is used for seaports etc. and has a high export and revenue potential. At present the company is involved in a legal battle with the NDFC regarding the repayment of all long term loans due to the institution and the present sums in the Balance Sheet being the interest and mark-up on those loans.
• The company can use its increased daily production facility as an advantage and try and enter the international market like the rest of the firms in the industry. It can gain a strong footing in the export area since it has a relative cost advantage due to prevalent economies of scale and the availability of latest technology.
• The reduction in sales and thus profits is having a deep impact on the overall liquidity position of the company and the profit margins as well.
• Remedial measures need to be taken to deal with the fall in sales revenue and margins.
• Since the company is one of the largest in the sector in addition to being renowned it will have no problem in differentiating and developing new products to widen its product and customer base. Latest products include oil-well cement, furnace blast cement, low alkali cement and rapid hardening cement. These types are quite common in international markets and local companies to enhance exports must offer the latest products.[26]

 

 

 

 

 

Company Information:

Board of Directors:

Mohd. Hussain Dadabhoy (chairman)

Razia Hussain Dadabhoy

Humaira Dadabhoy

Mohd. Amin Dadabhoy (CEO)

Yasmeen Dadabhoy

Fazal K. Dadabhoy

Naseemuddin

 

Company Secretary:

Nayyer Karim

 

Major Shareholders:

Categories	Number	Shares	%
Individuals	4942	10309110	25.86
Joint stock cos.	4	21492890	53.91
Fin. & Invest. Cos.	25	8066800	20.23
Total	4971	39868800	100

(SOURCE: Annual report 1999)

 

[1] Page Sept.7-13,1998

[2] Page,Sept.7-13, 1998

[3] IRS, Dec.1998

[4] Pakland report + IRS Dec. 1998

[5] IRS, Dec. 1998

[6] Pakland Report

[7] Page, Sept.7-13, 1998

[8] InvesCap Research, 1999

[9] Page, Sept. 1998

[10] IRS, Nov. 1997

[11] IRS, Feb. 1999

[12] IRS, Feb. 1999+ IRS,Nov, 1997

[13] IRS Feb. 1999 + Pakland Report

[14] Dawn, EBR,Feb.21-27,2000

[15] IRS, Jan. 1999

[16] IRS, Feb. 1999

[17] IRS, Jan. 1999

[18] Page, Sept.7-13, 1998

[19] IRS Feb. 1999

[20] VIS 1999

[21] Page, Sept. 1998 + Page Mar.15-21, 1999

[22] IRS, Feb.1999

[23] Pakland Brochure + Interview

[24] Annual reports + Interview + Co. Performance Review

[25] Pakland Research Report + IRS Nov. 1997

[26] Interview With Dy. Mgr. Mktg.

 

 

 

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