EXECUTIVE SUMMARY

Cement production in 1999-2000 is estimated at 16.1 million tonnes as compared to 10.4 million tonnes in the in 1995-1996. It is very difficult to fill the demand and supply gap. Cartel of manufacturers was formed that decided to restrict the sales of all the cement plants to around 50% of their maximum capacity and to raise the prices. There is also an opportunity to export cement. Pakistan is ideally located to export cement to the countries like Bangladesh, Srilanka, Syria, Myanmar, Lebanon, Singapore, Hong Kong and Vietnam. Rise in the costs of these inputs will further add crisis to already difficult situation of the industry.

 

Attock Cement Pakistan Limited project was conceived in 1981 and commenced commercial production in 1988. actual cement production is upto 800,000 metric tons. The company produces brand FALCON CEMENT.

 

Following Strategies are currently used at the company: Product Development through innovation. Differentiation on quality of FALCON CEMENT. Cost Cutting in Operations. Plant Rehabilitation Plan. Process Optimization

 

After study, following strategies has been recommended for the company: Market Development in North. Market Development by exporting cement. Product Differentiation based on quality.

 

CEMENT INDUSTRY IN PAKISTAN

PRESENT POSITION

Cement production in 1999-2000 is estimated at 16.1 million tonnes as compared to 10.4 million tonnes in the in 1995-1996. Till 1997 there were 26 cement plants in the country. Out of which 21 plants were in private sector and 5 were in public sector.

In last couple of years, as many as nine new cement plants are planned or implemented all the private sector. The capacity of these projects is estimated at 11.945 million tonnes .The existing plants have also planned to expand their capacities. This worked out to 5.070 million tonnes. Thus the total capacity of cement projects, existing and upcoming would be as follows:

CAPACITY OF CEMENT PLANTS (1997)

Status	No	Capacity (M.Tonnes)
Existing Plants	26	15.764
Expansion	–	4.030
New Projects	9	10.685
Total	35	30.479

 

Of the new projects only four with a capacity of 80330 million tonnes have come up to production stage by year 2000. Three of them are namely Fauji, Army Welfare Cement and Saadi Cement has gone into production this year. While the rest would come in the next couple of years . The following table gives the full picture of the emerging situation .The per capita consumption in the country is around 71.0 kg is little less than the internationally accepted standard of nearly 100 kg, but still better than the many other countries in the region like India, Nepal, Bangladesh and Malawi. Demand of the cement has a high correlation with a GDP, coefficient of correlation was found to be 93%. Following the privatization of the bulk of the public sector capacity and shrinkage of its operational jurisdiction, the development approach in the renewed scenario focused squarely on the realization of increment capacity gains at the existing cement plants by improving their run factor and efficiency level. A limited cost effective BMR program was introduced for each unit.

 

Following are new cement projects being set up since 1997:

New Projects	Location	Capacity	Year of Completion
Best way Cement	Haripur	945000	1998-99
Chakwal Cement	Chaakwal	1,900,000	1997-98
Galadari Cement	Baluchistan	660,000	–
Herclues Cement	–	1,900,000	–
Ibrahim Cement	–	945,000	1998-99
Lillaah Cement	–	1,500,000	–
Royal Cement	Punjab	945,000	1998-99
Sakhi Cement	Distt.D.G.Khan	945,000	1998-99
Sehwan Cement	Khanote Distt  Dadu	945,000	1998-99
TOTAL		10,685,000

 

There are at present 26 cement plants in Pakistan with 8 cement plants in Sindh, 11 in Punjab, 4 in NWFP, 2 in Balochistan and 1 in Islamabad with break up of capacities as follows.

 

Province	No of Plants	Capacity (tonnes)
Sindh	8	3.364
Punjab	11	7.344
NWFP	4	3.343
Balochistan	2	723
Islamabad	1	990
Total	26 (In 1997)	15.764

 

 

The following graph shows the production capacities of North and South plants from year 1993 to 2000.

Year	North Capacity	South Capacity	Total Capacity
1993-1994	5.6	4.1	9.7
1994-1995	6.2	4.1	10.3
1995-1996	6.1	4.3	10.4
1996-1997	8.3	4.3	12.6
1997-1998	11.3	4.3	12.6
1998-1999	11.8	4.6	16.1
1999-2000	11.8	4.3	16.1

From the above graph it is evident that production capacity in the South has remained constant since 1993. However production capacity in North is increasing. This is basically due to the installation of new cement plants in Punjab and NWFP. This effect has drastically increased the total production capacity of the country.

 

Following table show the capacities of individual plants as estimated in 1997 by IRS.

 

Company	Annual Production	Expansion (tonnes)	Year of  completion	Total Production
Anwar Zaib Cement	56,700	–	1988	56,700
Army Welfare Cement	945,000	–	1997	945,000
Associated Cement	270,000	–	1921	270,000
Attock Cement	693,000	–	1986	693,000
Cherat Cement	760,000	–	1985	760,000
D.G.Khan Cement	660,000	1,039,500	1997	1,699,500
Dadabhoy Cement	409,000	–	–	409,500
Dandot Cement	504,000	–	1983	504,500
Essaa Cement	150,000	–	1989	150,000
Fauji Cement	990,000	–	1997	990,000
Fecto Cement	600,000	–	1989	600,000
Gharibwal Cement	540,000	945,000	1997	1,485,000
Javedan Cement	600,000	–	1997	600,000
Kohat Cement	315,000	252,000	1996	567,000
Lasbela Cement	30,000	–	–	30,000
Lucky Cement	1,260,000	–	1996	1,260,000
Maple leaf Cement	1,540,500	–	1940	1,540,500
Mustakheem Cement	630,000	1,039,500	1997	1,669,500
National Cement	50,000	–	1997	50,000
Pak slag Cement	180,000	150,000	1997	330,000
Pakland Cement	504,000	504,000	1994	1,008,000
Pioneer Cement	660,000	100,000	1993	760,000
Saadi Cement	1,008,000	–	1985	1,008,000
Thatta Cement	330,000	–	–	330,000
Wah Cement	945,000	–	1956	945,000
Zael Pak Cement	1,134,000	–		1,134,000
TOTAL				18,850,200

 

Loan and financing arrangement for the recently established cement projects are as follows:

Name of Project	Capacity (M.Tonnes)	Financing
Saadi cement	1.00	NDFC
Sakhi cement	1.00	BEL
Royal cemnt	0.66	BEL
Chakwal cement	1.90	BEL
Best way cement	1.00	HBL
	5.56

.

 

The above projects are new and have started in recent past and capacity commissioned is as follows:

 

Existing Capacity	15.764
Capacity to be commissioned in 1998	2.000
Expansion to be commissioned in 1997	8.685
Capacity to be commissioned in 2000	4.001
Total	30.450

 

DEMAND-SUPPLY GAP

Following is the figures between increase in production capacity and sales along with the gap between demand and supply:

Year	Total Capacity	Total Sales	Gap
1993-1994	9.7	7.4	+2.3
1994-1995	10.3	6.7	+3.6
1995-1996	10.4	9.4	+1.0
1996-1997	12.6	9.5	+3.1
1997-1998	15.6	9.1	+6.5
1998-1999	16.1	9.6	+6.5
1999-2000	16.1	9.9	+6.2

 

The above graph shows the difference between demand and supply of cement in Pakistan. Since 1996, supply of cement has remained constant to about 9 million metric tons per year, but however production has increased during the period 1995 to 1998 from 10 million metric tons to about 16 million metric tons. This has increased the gap between demand and supply of cement in the country. Currently we have surplus production of around 6 million metric tons per year. It is expected that in next couple of years the production of cement will remain around 16.1 million metric tons.
The following graphs shows if the production of cement will remain at 16 million metric tons and demand will increase annually then how long will it take to break-even the demand and supply curves.

The above graph indicates that if the production capacity freezes at the current level and annual demand grows at the rate of 10% per year then till 2004-2005 production and consumption will break-even each other. If the growth rate of demand remains slower than 10% or if production increases above 16.1 million metric tons then it will take even longer to match supply and demand curves. From the historical data, we have following values of cumulative average growth rates during different intervals during last twenty years.

Period	Cumulative Average Growth Rate
1980-1981 to 1984-1985	9.7 %
1985-1986 to 1989-1990	5.60 %
1990-1991 to 1992-1993	6.50 %
1993-1994 to 1998-1999	2.10 %

 

Since the demand has declined during last 20 years and recently its cumulative average is 2.10 %, so it seems difficult to increase the demand of cement 10 percent annually. So it concludes that it is very difficult to fill the demand and supply gap till year 2005.

 

CARTEL OF MANUFACTURERS

The effect of over capacity was felt in the market in November 1997, when new plants came into production. This led to a cut throat competition and discounting / under-cutting of prices led to a price war. This resulted in substantial drop in prices.

At this time all the cement manufacturers joined their hands together, and formed a cartel to protect the industry from total collapse. This cartel decided to restrict the sales of all the cement plants to around 50% of their maximum capacity. To offset the decline in production, all the cement manufacturers decided to raise the prices. Initially there were some problems among the top management of different cement factories in order to reduce the production capacities, but later they all realized the importance of such an arrangement. Now this cartel has matured and all the factories are producing around 60% less then their production capacity and are selling at high prices.

Government has also shown its concern on the crisis in cement industry. Although they have not taken any action against monopolistic decisions taken by cartel of cement manufacturers but however they have reduced the excise duty on cement manufacture.

CEMENT EXPORT

Pakistan is ideally located to export cement to the countries like Bangladesh, Srilanka, Syria, Myanmar, Lebanon, Singapore, Hong Kong and Vietnam. Most of these countries will always be importing cement because they lack in limestone reserves and will be permanent buyers of Pakistani cement that is very desirable in these countries because of its high quality. Presently India and China are enjoying the benefits of selling cement to these countries because their cost of production is very low as compared to Pakistan and their government subsidies cement exports.

According to the Industrial Research analysis of November 1997, there was a gap of 17.7 million in these countries and cement producers of Pakistan planned to capture 30% of the market in the 1998-1999 and 50% in the year 1999-2000. This would have generated much needed foreign exchange of US dollar 345 million in the year 1997-98 grown to US dollar 697 million by the year 2000

Pakistan can offer better quality cement for export at Dollar 5 per tonne cheaper than china’s comparatively lower quality cement. Pakistan could earn five billion dollars by selling 1 million tonnes of cement at a comparative rate of dollar 50 per tonne. Pakland Group which is the major sponsor of Saadi Cement project, is planning to go into export business and for this purpose the group has been given permission to construct its own jetty at port Muhammad bin Qasim. The construction of Rs. 250 million project of private jetty was aimed at facilitating its cement export. India may not prove to be potential market for Pakistani cement despite the fact that Pakistan’s quality is far better than India’s but the price difference may play a key role in this regard. The cement makers demand the following concessions for the export of cement.

• The producers propose 50 percent rebate on freight of cement by bringing cement / clinker under the list of non-traditional exports.
• Duty and surcharge drawback should be allowed on all production inputs. Presently the duty draw back is restricted to customs duty paid on finished products whereas cement production has to bear a number of taxes, surcharges and duties etc at various stages of production amounting 35 percent of total production cost. “Unless all the duties / taxes categorized as surcharges , development surcharge of additional surcharge etc levied on consumption of electricity, Sui gas, furnace oil are reimbursed to the exporter , it would not be possible to compete in the international market”
• In the last budget the government allowed export of cement by sea only. Export of cement may be allowed by road also, so that markets in Afghanistan and Central Asia can be fed.

It is important for government to realize that much needed foreign exchange can be earned by utilizing capital assets which would other wise be under-utilized.

Following table displays annual consumption of cement by different countries where we can export cement and their per capita consumption of cement.

Country	Annual National Consumption (Million Tons)	Per Capita Consumption (Kilograms)
China	512.0	422
India	85.0	89
Indonesia	19.3	95
Japan	70.0	546
Korea	42.5	910
Malaysia	11.5	530
Pakistan	9.1	72
Philippines	13.7	187
Sri Lanka	2.2	118
Taiwan	20.8	960
Thailand	21.1	348

Following table displays the potential demand for import of cement in various countries.

Country	1997-1998	1998-1999	1999-2000
Bangladesh	2,365	2,485	2,612
Sri Lanka	1,526	1,648	1,719
Syria	706	792	889
Myanmar	1,728	2,073	2,488
Lebanon	1,671	1,721	1,722
Singapore	3,926	4,005	4,085
Hong Kong	2,405	2,463	2,522
Vietnam	3,373	3,727	4,118
Total	17,700	18,914	20,205

 

So based upon above figures and graph, we conclude that there is a lot of demand where we can export our excess production of cement and can earn foreign revenue in this regard.

COST OF SUPPLIES

Apart from decline in demand of cement, costs of inputs are continuously increasing. This include increase in costs of furnace oil, gas and electricity and imposition of General Sales Tax (GST). Rise in the costs of these inputs will further add crisis to already difficult situation of the industry.

Short-tem future outlook of the industry still remains negative unless there is a substantial increase in the demand or the government encourages exports by providing incentives.

FINANCIAL ANALYSIS OF CEMENT INDUSTRY

Following are the industry averages of Pakistani Cement Industry, as extracted from F & J Industrial Averages.

Ratio	1996-1998	1993-1995	1990-1992
Earnings per Face Value %	11.66	74.60	33.66
Earnings per Share (Rs.)	1.17	7.46	6.56
Revenue per Share (Rs.)	28.02	71.98	136.40
Return on Equity %	5.62	32.87	18.28
Return on Investment %	3.23	11.27	6.17
Return on Capital %	9.55	31.88	18.82
Net Profit %	5.66	15.18	7.64
Gross Profit %	18.51	30.61	20.38
Times Interest Earned	5.90	17.89	15.89
Fixed Assets / Equity & Debt	1.02	0.90	0.99
Debt Leverage	1.62	2.63	2.82
Sales / Inventory	0.56	30.41	17.65
Asset Turnover	1.16	1.55	1.78
Collection Period (days)	12	5	10
Inventory Age (days)	41	35	43
Current Ratio	1.41	1.29	1.04
Payables / Receivables	3.26	16.68	3.12
Inventory / Current Liabilities	16.35	0.16	0.18

 

From the above ratios, it is evident that in the period from 1993-1995, industry ratios are very high. This indicates a golden era of cement industry in Pakistan. Most of the ratios has declined in the period 1996-1998. Earnings per share has decreased from Rs. 7.46 per share to Rs. 1.17 per share. Earlier revenue earned per share was Rs. 71.98 per share that has declined to Rs. 28.02 per share only.

In 1993-1995, return on equity was 32.87 per cent that has declined to 5.62 per cent. This indicates that earlier it took around three years to double the equity, but now it would take around sixteen years to double the equity. Similarly return on Investment and return on capital figures are more favorable for period 1993-1995, as they have declined from 11.27 and 31.88 to 3.23 and 9,55. This indicates that return on all, weather we talk of equity, investment or capital, has declined.

Earlier Average Net Profit was around 15.18 percent, that has reduced to almost one third to a figure of 5.66. Gross profit has decreased from 30.61 percent to 18.51 percent. Comparison of decline of in Net Profit and Gross Profit indicates that the decline is not due to interests and taxes, however it is mainly due to operating expenses or reduction in marginal income.

Times Interest Earned has dropped from 17.89 to 5.90, this indicates that profit before interest and taxes has declined or interest paid has increased. Comparing this figure with other ratios, it is evident that the ratio has declined due to decline in Gross Profit of the industry.

Fixed Assets to Equity and Debt ratio has been around 1.0 since 1990, indicating that nearly all the assets in cement industry are fixed assets. For interval 1996-1998 the figure is 1.02 indicating that on average the companies has suffered loss and there Debt and Equity has gone below the level of there fixed assets. This is an alarming situation for the whole industry as there are many cement factories that will be incurring this loss. Debt Leverage ratio declined from 2.6 to 1.6, that indicates that older plants has paid back their debt and now relying more on their equity. However, still they are relying more on debt then equity. For cement industry, capital requirements are very large, so most of the investment is from long term debt as compared to equity. Companies prefer to obtain long term debt as compared to floating their shares or arranging equity from other sources of fund raising.

One of the most significant ratios is Sales/Inventory ratio, in 1990-1992 this was around 17.6 and then it increased to 30.41 in 1993-1995 but however for the period 1996-1998 the figure has gone down to only 0.56. This indicates that in early 90s, inventory stocks were very low as compared to sales. i.e. there was a high inventory turnover but in 1998 sales are around half of the inventory piles.

Another significant difference is in Inventory/Current Liabilities ratio that has increased from 0.16 to 16.35. This also due to large piles of inventory stocks in recent years. Moreover companies has controlled their current liabilities.

 

Following are the Composite Statistics of Cement Industry as extracted from F & J Almanac.

Year	1992	1993	1994	1995	1996	1997	1998
No,Companies Reported	10	11	14	14	18	19	18
Sales	6,724	9,847	11,868	11,825	15,379	13,692	13,129
Depreciation	427	678	789	816	1,203	1,165	1,747
Financial Charges	428	678	685	690	1,246	1,058	1,595
Taxation	179	697	923	853	470	77	(28)
Net Profit	465	1,406	1,801	1,478	484	(1,260)	(1,777)
Cash Dividend	251	674	461	247	253	72	0
Net Working Capital	(387)	(23)	211	3,543	4,628	(2,450)	(6,563)
Fixed Assets	5,722	8,656	13,685	17,807	35,759	46,896	49,057
Long Term Liability	2,871	5,321	6,638	7,929	16,561	19,832	19,135
Paid-up Capital	1,818	2,376	3,587	7,352	15,855	18,707	18,476
Retained Earnings	798	1,776	3,202	8,068	8,800	7,085	5,824

All figures are in million of rupees.

No. of companies indicate that data of how many companies has been collected to prepare the composite statistics. Sales of these companies has increased from 6724 million rupees to 13.129 billion rupees. Taxation has increased till 1995 upto 853 million rupees but in 1998 it has gone down to negative figure (tax benefit) due to loss incurred by the companies. Net Profits were recorded highest in 1994 upto Rs. 1,801 million but in 1997 and 1998 composite statistics show net loss. Cash dividends were highest in 1993 674 million rupees, but they have declined thereafter. Fixed Assets has increased from 5,722 million Rupees in 1992 to 49,057 million Rupees in 1998. This is due to increase in number of number of factories from 10 in 1992 to 18 in 1998. However this increase is not proportional. Similarly there is an increasing trend in Long Term Liability and Paid up capital. Retained Earnings of these companies has increased from 798 million to 5,824 million.

 

COMPETITOR ANALYSIS: BESTWAY CEMENT

Best way cement: Pakistan cement output has received a boost since dollar 170 million Bestway Cement plant at Hatter in the NWFP goes into production in 1999. This cement project has been sponsored by the UK based Bestway (holding) Ltd. an Offshoot of the best way business group of London, which is headed by Rawalpindi born Muslim Multi Millionaire, M A Pervaiz who was settled in UK  late in 1950’s

The best way company plant at Hattar which is about 150 kilometres from Peshawar was completed in the shortest possible time because of the intensive use of latest technology from Japan, Germany and the USA. The main Plant supplier is Japan’s MITSUBISHI heavy industries, the powerful crushing plant is  imported from Germany while the Cement Mill is from Fuller Company of USA. The Heavy Mechanical Complex, Taxila, is supplying most of the local machinery components, at the cost of rupees 400 million.

The source of raw material supply, including limestone and gypsum, is located barely a kilometer away from the plant site. To converse energy, the plant will use  the Dry Process Technology .The quality of the  raw material ,  limestone, gypsum and clay, is reported to be very good after tests. The plant will have international pollution control standards.

The reputed firm of Cem-en-con is Bestways consultant for the cement project. Japan’s Mitsubishi industry will train the plant Pakistani technical personal. Electrical equipment is mostly form Siemens of Germany.

When in full production, the Bestway Cement plant may produce 1.1 million tones of cement a year, it will employ more than 400 workers, and cement sales will provide employment to many more in retail outlets. Beside , Pakistani demand  the plant can supply some cement to Afghanistan. In due course Bestway limited will offfer shares in Pakistan for public subscription.

 

COMPETITOR ANALYSIS: CHAKWAL CEMENT COMPANY LTD

Sponsored by Chakwal group the company was incorporated as a private limited company on May 23 1993. Company is setting up a Gray Ordinary Portland cement manufacturing plant with a capacity of 5500 tones per day of clinker and 1.9 million tonnes of cement per year. The plant will be one of the largest ones in Pakistan.

The sponsor  has sufficient experience in running a cement plant by virtue of its controlling interests in Dandot Cement  Company Limited .The machinery will be supplied by the world’s renowned cement plant manufacturer M/S F. L. Smidth and Co. A/S (“F. L. Smidth”)

The company has entered into an onshore contract dated 28th October 1994 with F. L. Smidth an onshore contract dated same day with cement plant consultants A/S (CPC). F. L. Smidth has worked closely with CPC on several projects in Pakistan and F. L. Smidth guarantees CPC’s obligations under the contract.

Local Machinery in Pakistan will be manufactured by CPC according to the specification and supervision of F. L. Smidth. CPC will also be responsible for installing the equipment. Civil works will be carried out by the local contractors with F. L. Smidth. The company is negotiating for the procurements of Quarry and mining equipment with US and European based suppliers.

The total estimated value of mining and quarry equipment is Rs. 307.3 million. The plant will employ dry process of production, suspension pre-heated kiln system which is more energy efficient than the wet and semi wet process employed at some of the older plants. The plant will be automated in many areas which will lower labor costs and improve the quality of the product. The project will commence trial run by September1997and commercial production will be started in October 1997. Estimated cost of the project is Rs 7,159 million.

 

COMPETITOR ANALYSIS: FAUJI CEMENT

This project has gone into construction on September 26th,1997.This project has been setup by Fauji Foundaation at Fateh Jhang some 40 km from Islamabad. Fauji Foundation owns 46 percent of the equity of the plant with nine percent of industrialization fund for developing countries (IFE). F. L. Simdth & company and International Finance Corporation (IFC). Six percent of the common wealth development corporation (CDC), three percent of Netherlands financierubgs-Maatschappij Voor Ontwikkelingslanden N.V. (FMO) and Al-Faysal Investment Bank limited (AFIBL), two percent of Dutsche Investment (DEG) one percent of FCCL employees trust and general public holds 12 percent equity of the company.

Production capacity of Rs 5.3 billion plant is 3000 tonnes per day. Out of total 10500 tonnes equipment about 5600 equipment has been imported from Denmark and other European countries. Most of the machinery has been supplied by F.L. Smidth and company of Denmark, whereas local machinery in Pakistan has been manufactured by DESCON. Works were designed by the local consultant A.A Associates. The plant is pollution free as the sponsors had carried out a through environmental impact study and the plant compiles with the environmental guidelines prescribed by the World Bank.

 

COMPETITOR ANALYSIS: SAADI CEMENT

Saadi cement is in the process of establishing a two-line state of the art plant for manufacturing 3600 tonnes per day of Portland cement using the dry process system of production. The ground breaking of Saadi Cement Limited took place in December 1994 line-I of 1,800 tonnes per day was expected to go into trial production in May 1997 and line-II in July 1997. The selected site is adjacent to Hattar Industrial Estate in the North West Frontier Province of Pakistan (NWFP) and enjoys incentives of reduced rates of import duties on plant and equipment and exemption from payment of sales tax on cement upto the year 2001. The plant is ideally located from a marketing perspective being in close proximity to the regional markets of Northern Punjab and NWFP.

The major component of the imported plant and equipment is being supplied by world renowned cement plant suppliers UZINEXPORTIMPORT S.A.ROMANIA, under an offshore agreement which will provide equipment consisting of raw material crushing, sampling and pre-homogenizing equipment, raw-milling and homogenizing equipment, suspension pre-heaters and calcination equipment, kiln and clinker cooler, clinker extraction , gypsum propositioning and feeding equipment, cement milling equipment electrostatic pre-capacitor, dust collector and cement storage and dispatch equipment .The total cost of imported plant and equipment from UZINEXPORTIMPORT S.A.ROMANIA and its associated suppliers is US$27.22  million inclusingUS$406,800 to be paid in respect of supervisory and advisory services. L/S’s amounting to US$26.910 million already been established.

 

ATTOCK CEMENT PAKISTAN LIMITED

Attock Cement Pakistan Limited (ACPL) project was conceived in 1981, construction started in 1982, trial / test production and commissioning phase started in September 1986 and the plant finally commenced commercial production on 1^st June 1988.

PROJECT SPONSOR

ACPL is a member of Pharaon Group of companies operating in Pakistan. Pharaon Group, headed by Dr. Gath Pharaon, a Saudi National has made a number of investments in Pakistan. The group has invested heavily in the following projects in Pakistan:

Attock Cement Pakistan Ltd.

Attock Oil Refinery

Attock Chemicals

Attock Industrial Products

 

Hence ACPL’s project is a Pak-Saudi joint venture and has involved an initial capital outlay of around Rs. 1.5 billion with a foreign exchange component of around US Dollars 45 million. This makes it one of the largest enterprises in the private sector and certainly the biggest single investment from brotherly countries in the Middle East.

LOCATION

ACPL’s manufacturing plant is located in Hub, District Lasbela, Baluchistan at a distance of about 45 kilometer north west from Karachi. A 16-kilometer road connects the factory from the Hub town, out of which 8 kilometer is Government road and the remaining 8 kilometer section of the road which branches off from the Government road has been built by Attock Cement and belongs to the Company.

APCL has acquired over 575 acres of land for construction of the plant, residential colony and other infrastructure facilities. In addition to this, a mining lease has been obtained from the Government of Blauchistan covering an area of about 5000 acres for lime stone deposits and 12000 acres for shale. The lime stone deposits are estimated to be around 50 million tons and are considered sufficient for a period of at least 50 years at the present rated production capacity of the plant.

The plant is the first in the country based on latest Suspension Pre-Heating / Pre-Calcination dry process technology which results in substantial savings of fuel energy. It is, therefore, with a sense of pride that ACPL claims pioneer status in bringing this technology to Pakistan.

Head Office of the project is located in PNSE Building, Near Bahria Complex, Karachi. All the administrative departments including Marketing, Finance, Electronic Data Processing are located in the Head Office.

PRODUCTION CAPACITY

The plant’s original manufacturing rated capacity was 600,000 metric tons of clinker which after optimization/de-bottlenecking, which was completed during April-June 1994 has been increased to 705,000 metric tons. The plant’s original rated manufacturing capacity for cement was 630,000 metric tons but actual cement production of upto 800,000 metric tons has been made possible by better planning of operations and use of grinding aids. Further rated capacity for cement manufacturing was increased by putting up one additional cement mill of 300,000 metric tons capacity by the end of 1998, now able to grind the additional clinker quantities which have become available after optimization/de-bottlenecking.

NEW POWER PLANT

In view of ever increasing electric power charges and anticipated shortage in power supply and frequent voltage fluctuations ACPL plans to put up a 25 MW self generation power plant at the factory to ensure uninterrupted cement production. Currently the power plant feasibility report is in progress.

RANGE OF PRODUCTS

ACPL is presently primarily engaged in manufacturing of Ordinary Portland. Sulphate Resistant and Portland Blast Furnace Cements which it sells under its Registered brand name of FALCON CEMENT in the market in bags and in bulk through its own fleet of bulkers wherever required and feasible.

ACPL has also test-produced Pure Slag, Limestone Cement, Masonry Cement and high value product. Oil well Cement, which is presently being imported but would become possible to produce locally by ACPL after the additional cement mill has been set up and additional silos become available. ACPL is also looking at the feasibility of producing for its valued clients certain types of cement / polymer etc. mixes for specialized applications.

ACPL also produces and supplies to large internationally funded projects a superior quality FALCON AGGREGATES and is actively considering collaboration in downstream based activities such as block making, dry-readymix, readymix concrete, pre-casting etc. so as to be in a position to offer a more complete range of products and services.

Furthermore, ACPL also takes care of specific additional large requirements of bulk consumers, that cannot be met from local production.  In this regard, at times of cement shortage ACPL makes arrangements through its Sponsors for import of cement in bulk and its bagging on-board a Floating Cement Storage and Bagging Terminal stationed at Port Qasim.

It will thus be seen that ACPL is not a pioneer / leader in its field of operations in Pakistan but also a responsive and innovative supplier of high quality products needed by its quality conscious customers.

MARKETING SET-UP

Marketing is done mainly through area-wise distributors who have their own dealers/retailers network and also directly to the various Government, Semi Government and Private institutional organizations throughout the country. Whenever it has become marginally viable ACPL has also exported a small proportion of its clinker/cement production so as to gain a foothold in the international market and have now sufficient experience to arrange and export its products on a short notice.

MANAGEMENT PHILOSOPHY

• The Management has a responsive attitude to the uncertain environmental conditions in the cement industry.
• The Management believes in decentralization of responsibility and authority.
• The Management believes in developing team spirit among the employees and to promote mutual trust
• The Management focuses on timely and collective decision making process.
• The Management do not compromise on integrity and strictly monitors observance of rules and regulations.
• The Management is developing a culture of cost control and has improved the process of performance evaluation.
• The Management continuously reviews the systems and procedures in the organization.
• The management encourages open and frank communication among the levels of organizational hierarchy.

 

QUALITY OF RAW MATERIAL AND FINISH PRODUCTS

A lime stone deposit of very high quality exists about three kilometers from the crusher. The limestone quarry development has been completed, but fortunately a large quantity of conglomerate limestone has been found to be available in the shale quarry. This is a ready mix for cement manufacture and does not involve quarrying and blasting and, as such, it is being used as a raw material at considerable savings to ACPL.

A small percentage of iron ore is also being used for having desired composition and modules.

The cement produced has a pleasing greenish color and conforms to American, British and Pakistan Standards. In view of its color and early strengths it has become quite popular and is in great demand in and around Karachi, in Blouchistan and is also being marketed in Punjab.

QUALITY CONTROL METHODS

Highest standards of quality control are ensured through online chemical analyses of raw material with X-ray Analyzer, Computer and Central Control Laboratory. As a result cement manufactured by ACPL surpasses by a high margin the early strength required by the Standard specifications and its initial setting time is ideal for manufacture of concrete blocks and quick removal of shuttering at construction sites. Also since the raw materials are almost free of the deleterious constituents like chlorides, alkalis and magnesium, the cement produced is very sound and has low expansion factor.

Each of the operational / functional divisions of the cement are headed by highly qualified professionals with well over 15 years relevant experience in their particular fields. The success of the Management team can be gauged from the fact that they have successfully operated for the first time in Pakistan the Pre-calcination/pre-heating technology. This technology is introduced by ACPL and FALCON CEMENT and is now the undisputed market leader and proudly holds the following records in Pakistan for a 630,000 metric tons per annum rated cement plant:

1. Highest ever dispatch in one month period 70402 MT
2. Highest ever dispatch in one fortnight’s period 39112 MT
3. Highest ever dispatch in one week’s period 24198 MT
4. Highest ever dispatch in 24 hours period 4321 MT
5. Highest ever dispatch in one year period 728176 MT

CONTINUOUS INNOVATION

The company’s continuing success is attributed to its policy to innovation/flexibility and introduction of new products and services to satisfy market demand. The superior and consistent quality of its products which have been tested time and again by respected consultants/contractors at internationally known laboratories around the world have influenced them to prescribe the use of Falcon Brand Products for highly prestigious, internationally funded supervised projects of national importance.

ACPL’s CONTRIBUTION TO THE WELL BEING OF THE HUB AREA

ACPL’s project is a landmark in the industrial development of Pakistan and particularly of the Provinces of Blauchistan and Sindh. The part of Hub Chowki where the plant is now located was at one time a completely barren place where no mechanized vehicle had ever entered and which lacked all basic amenities such as water, electricity, gas or drainage. ACPL has laid a 7 kilometer long water pipeline to bring water form Hub canal, financed construction of a 52 kilometer long gas supply network, paid for 12 kilometer of electric transmission lines apart from construction of over 8 kilometer of access roads and culverts. Also, despite the very high degree of automation which is employed in this most modern plant the project already has and will continue to provide much needed jobs opportunities to a substantial number of personnel directly and to many more indirectly. As a result the once rugged area near the plant site has turned into a landscape bustling with life and prosperity.

ACPL’s project has stimulated economic activity in various spheres and at different levels and fostered valuable development in the Hub Area by providing means by which most of the basic infrastructure has been built for the benefit not only of ACPL’s plant but also for the whole area.

CLEAN ENVIRONMENT AND POLLUTION CONTROL

The traditional concept of a cement plant is of dust and smoke, where no vegetation and greenery could exist. However, with the help of modern technology ACPL has incorporated dust arresting devices like electronic precipitators and high efficiency dust filters which has resulted in a cleaner atmosphere in and around factory. ACPL has also undertaken planned plantation over the years. These trees are maintained regularly and these are now blooming. The clean and green environment makes a positive contribution to the working conditions.

EMPLOYEES WELFARE

ACPL is an enlightened employer. The total strength of the employees of all cadres is presently around 458 out of which about 395 are employed in the factory.

Location	Planned	Actual (June 30,2000)
Head Office	71	58
Factory	429	395
Central Office	9	5
Total	509	458

 

Similarly, Cadre wise distribution of employees is as follows:

Cadre	Planned	Actual (June 30,2000)
Senior Management	93	75
Junior Management	113	97
Workers	303	286
Total	509	458

 

High stress is laid on proper recruitment on merits and professional management and as a result the plant operations are being managed and operated by personnel most of whom are highly qualified in their respective fields and have long experience of operating cement plants both within and outside the country.

Majority of the officers and workers commute to the factory form Karachi in comfortable buses, coaches and cars.

For the essential staff that is required to stay on factory premises, there is a well laid out residential estate with an air-conditioned mess with eight suites and a number of Bungalows for officers and family quarters for workers. In addition to this, there is a beautiful mosque and a medical center with full time medical officer. The medical center has a facility of tow beds also. To cope with emergencies there is a well-equipped ambulance for transporting sick staff to hospitals in Karachi, if God forbid there is a need. There is also a recreational center with facilities for games, children’s park and workers canteen where arrangements exist for afternoon and evening meals. Transport facility has also been provided to the children of the staff/workers residing in the colony for taking them to educational institutions at or around Hub, for the up-keep of which ACPL also gives assistance when required.

PRODUCTION AND SALES

The company has been producing around 700 metric tons of clinker and cement from year 1996 to 1998. After 1998, due to over production of cement in the North Pakistan, there was a lack of demand in the economy. As a result, all the cement manufacturers decided to reduce their cement production to a level of 50% – 60% of present production level.

The following table and graph shows the production of Clinker and Cement during last ten years:

Year	Clinker ( 000 tons)	Cement ( 000 tons)
1991	609	655
1992	605	720
1993	674	591
1994	515	600
1995*	365	280
1995-96	736	632
1996-97	739	726
1997-98	701	565
1998-99	352	468
1999-2000	439	478

 

* Due to change in accounting year, this figure represents six month data

 

Since clinker is used for the manufacture of Cement, so all the clinker produced each year was consumed the same year or the next year. In early 90’s production of cement and clinker as around 600 million. Figure for year 1995 is low as it is only 6 months data. Production of cement and clinker has drastically improved in years 1996-1997. But after 1997, due to new plants setup in South and over production of cement in the country, production of cement was reduced to 50% – 60% of its original capacity.

 

The following table and graph shows the production of Cement as compared to sale of cement by Attock Cement Pakistan Limited, during last ten years:

Year	Production( 000 tons)	Sales (000 tons)
1991	655	675
1992	720	708
1993	591	602
1994	600	774
1995*	280	336
1995-96	632	748
1996-97	726	746
1997-98	565	563
1998-99	468	471
1999-2000	478	483

 

* Due to change in accounting year, this figure represents six month data

 

 

Due to decline in demand Attock Cement Pakistan Limited has decreased both Production and Sales. Infect only that quantity of cement is produced that could have been sold. Although the company can produced even upto 800,000 tons, it has decreased its production level to below 500,000 tons to avoid inventory pile-ups.

PLANT REHABILITATION PROGRAM

Ever since commissioning in 1988, stability in Plant operations has gradually been achieved by replacing some of the crucial equipment (electric motors and components). Due to the increased demand for cement in country, a plant optimization program was carried out in 1994 and the clinker production capacity was enhanced from2000 tons per day to 2400 tons per day. Plant operations further stabilized after the optimization program and resulted in substantial improvement in reliability and efficiency of the operations. Despite the replacement of a number of crucial equipment, substantial portion of the plant still remains that of Romanian origin and regular maintenance and replacement of parts is required to avoid undue stoppage in operations.

The plant is in operation for last fourteen years and some areas have now started to show signs of aging / fatigue which need to be regularly monitored and possibly replaced to ensure reliable operation. Detailed review / technical audit of the plant has been carried out certain crucial areas have been identified where major maintenance / replacement will have to be undertaken not only to control and reduce the maintenance cost but also to protect the life of the main components and to maintain the productivity and efficiency of the plant.

The present financial position of the company and the short term outlook for the cement industry does not justify carrying out the entire rehabilitation program in one or two year’s period. The program has therefore been spread over next three years and will be reviewed in each year subject to the financial position of the company and the actual requirement of each project. Following are the details of the program.

 

PLANT REHABILITATION PROGRAM

Sr No	Area/Main Equipment	Project Brief	Implementation Year	Estimated CostMillion Rs.
1	Mining / Quarry	Procurement of:Crawler Drill ECM 250Air compressor (625 CMF and 170 PSI)Required of winning 5000 tons per day limestone for plant requirement after exhaustion of overburden deposits which is sufficient for next two years. The existing old second hand existing machine cannot produce the above requirements	Year 3	17,642
2	Limestone crusher	Requirment of Appron conveyor (Complete with pan, chain, roller etc.)Aging machinary requires frequent maintenace and results in break down as such requires replacement with improved desing.	Year 1	8,000
3	Raw Mill	Procurement of Inlet/Outlet trunnionThe repaired cracked trunnion reliability is unpredictable therefore a trunnion is being purchased for immediate replacement.	Year 1	30,000
4	Pre-heater / Kiln	Conversion cyclone 1A and 1B to low pressure design.Converison to low pressure design will result in reduced ID fan power consumption and corresponding improvement in gas flow through Kiln / preheater.	Year 2	3,500
5	Pre-heater / Kiln	Co/O2Nox gas analyzer for kiln inlet The existing analyzer was unreliable when in operation. Now it is out of operation and is beyond repair. Requires replacement, improved design system to economize on fuel consumption and operational stability.	Year 2	10,000
6	Pre-heater / Kiln	Co/O2Nox gas analyzer for pre-calciner outlet 60 percent fuel is fired in pre-calciner but there exists no system of monitoring the combustion state which is essential to improve. Thermal efficiency and reduction in Co/Nox emission.	Year 1	7,000
7	Pre-heater / Kiln	Installation of Kiln feeder on bypass lineThe existing feeder had original feeding range 0-170 tph which has been upgraded to 180 tph. However, its accuracy is not consistent . also in case of any problem in existing feeder the bypass line is operated without any indication of feed rate, therefore, a new feeder of 0 – 250 tph is to be installed on existing bypass line	Year 1	3,000
8	Cement Mills	Installation of new outlets trunnion and reversing of girth gear of mill number one.The severely cracked outlet trunnion which was repaired in 1993 had circumfrential cracks again beside the repaired portion in April 2000. Since the reliablity of the repaired trunnion is unpredictable it is time to replace it with already procured trunnion. During the replacement , the girth gear will also be reversed to have matching surfaces as existing faces have steps due to 14 years of operations	Year 1	1,300
9	Cement Mill # 1 & 2	Alternate cement conveying system from Mill # 2 to airlift of Mill # 1The maximum production capacity of C.M. 2 is at present limited by operating capacity of tis cement conveying FK pump (45 TPH) inspite that the Mill system has potential to produce more. This bottleneck could be overcome by diverting grinded cement to airlift of C. M. 1 when the C M 1 is in stop condition. This requirement is essential when Mill 1 would be on shutdown for replacement of Trunnion for aa period of about 2 months. During this period only  Mill 2 would be in production to an expected rate of 60 TPH while using grinding aid to meet the despatch requirement.	Year 1	1,300

 

10	Quality Control Department	Introduction of ISO 9000 – Quality Management SystemISO 9000 would be introduced as a first step in quality control department for assurance of product quality.	Year 1	0.600
11	Plant	Emergency Generator for Plant – 400 KV A (Second Hand)The Romania Generator 340 KV has outlived its life, spare parts are not available, whereas the Roll Royce 240 KVA is also about 15 years old and is not sufficient capacity to cater for emergency equipment including operations of 01 packing plant and pump for water recirculation.	Year 2	2,000
12	Main Grid Station	Provision of Service supply from Main TransformerThe to9w main transformers have one each service transformer for its own power supply, one of this service transformer is utilized for supply to colony and water works which has made it compulsory to keep both the Main Transformer operative all the time. In case of supply provision except to use portable Diesel Generator to overcome this limitation. Both sections of grid station would be extended with circuit breaker cubicals, ot of which one each will be used for colony and the second to remain as spare. The requirement of this extension are: 2 Nos circuit breaker 6 KV 630 AMPs associated H.T. cables 200 meters switchgear elements.	Year 2-3	5,500
13	Plant	Consultancy for Plant AuditIncluding Process, Automation, Electrical Systems, specific studies and recommendation for identified aspects.	Year 2	4,400
				Rs. 96.942 MLNUS$ 1.763 MLN

 

ORGANIZATIONAL STRUCTURE

Management of Attock Cement Pakistan Limited is divided into two categories. General Management is located at the Head Office and Technical Management is located in the Factory.

 

 

 

 

 

 

The General Management of the factory includes the departments of Finance, Electronic Data Processing, Personnel and Administration, Marketing, Commercial and Internal Audit. All these departments are staff departments and support the production activity of the factory. General management of the factory is located at Head quarters in PNSC building.

 

The technical departments are responsible for managing the operations of cement manufacturing process. The current organization structure is optimal to suit the requirements of the factory.

FINANCIAL ANALYSIS

Following are the key financial figures for last five fiscal years:

Particulars	UOM	1995-96	1996-97	1997-98	1998-99	1999-00
Sales in Value	In Rs. ,000	1,499,665	2,856,343	2,113,308	1,879,568	1,271,303
Gross Profit Margin	%	8.2	11.0	10.2	7.1	18.2
Operating Margin	%	5.1	6.5	7.2	3.7	13.3
Profit / (Loss) After Tax	In Rs. ,000	(62,341)	78,550	164,886	(24,442)	83,009
Reserves	In Rs. ,000	273,624	352,174	356,421	331,979	358,765
Earning per share	Rs.	(1.6)	2.0	2.9	(0.4)	1.3
Current Ratio	Times	0.8	0.6	1.0	1.0	1.3
Debt to Equity Ratio	Ratio	62:38	56:44	51:49	48:52	40:60
Cost of Sales	In Rs. ,000	1,376,696	1,265,846	1,013,488	985,488	1,039,793
Selling & Dist. Exp.	In Rs. ,000	28,669	107,901	40,677	44,838	41,823
General & Adm. Exp.	In Rs. ,000	18,346	20,376	23,811	20,256	21,028

 

Sales of the company were highest in 1996-97, after that it started to decline. Among the five years, sales are lowest in 1999-00, this is mainly due to reduction in production capacity. Gross Profit Margin has gradually increased, it is highest in 1999-00 upto 18.2 percent. This is due to control on cost and high selling prices of FALCON CEMENT in the market. Operating Margin has also increased. It is highest in 1999-00 to a value of 13.3 percent. There is a random trend in Profit and Loss of the company. Company showed a loss in 1995-96 and 1998-99. Profit was highest in 1997-98. Due to reduction in production capacity, 1999-00 has also been a successful year but this is not as successful as 1997-98. The company has maintained its Reserves to a level of 3 billion rupees through out the period. Earnings Per Share were highest in 1997-98 to a level of Rs. 2.90. last year it was Rs. 1.30 per share.

The company has gradually increased its current ratio. In 1995 it was 0.8 that has gradually increased upto 1.3 in 2000. This indicates that in 1995 current liabilities were more than the current assets of the company, but now the company has more current assets then current liabilities. This is basically due to increase in inventory. Due to lack of sales the inventory has piled up and this has increased the current ratio of the company.

Another positive trend has been shown in Debt to Equity Ratio. In 1995, this ratio was 62 percent debt and 38 percent equity. In 2000, ratio of debt has been decreased to 40 percent and equity is 60 percent. This is due to the fact that the company is paying off part of its long term debt annually.

There is no significant difference Cost of Sales. This is due to increase in the cost of utilities with the decrease in sales. So overall cost of sales has remained constant.

Except for the year 1996-97, Selling and Distribution Expenses have remained nearly the same. As compared to 1998-99, these expenses has declined by 3 million rupees.

General and Administrative Expenses have been nearly constant throughout the five years. There is a minor growth as compared to the figure of 1998-99.

Following are summary of some of the expenses in the factory.

Plant Repair And Maintenance

Year	Cost in Mln Rs.
1991	32
1992	56
1993	51
1994	90
1995	33
1995-96	66
1996-97	86
1997-98	101
1998-99	34
1999-00	67

Excise Duty and Taxation

Year	Cost in Mln Rs.
1991	396
1992	369
1993	380
1994	645
1995	322
1995-96	720
1996-97	1,268
1997-98	874
1998-99	756
1999-00	667

 

Rate of Furnace Oil per Metric Ton

Year	Cost in Mln Rs.
1993	2,843
1994	2,843
1995	2,986
1995-96	3,640
1996-97	6,296
1997-98	5,500
1998-99	6,070
1999-00	11,132

 

Gas Rate per Unit of Consumption

Year	Cost in Mln Rs.
1993	39.54
1994	67.77
1995	84.05
1995-96	89.09
1996-97	102.46
1997-98	102.46
1998-99	102.46
1999-00	138.00

 

 

Shareholder’s Equity

Year	Cost in Mln Rs.
1991	248
1992	331
1993	593
1994	722
1995	753
1995-96	675
1996-97	754
1997-98	919
1998-99	894
1999-00	977

 

Long Term Liabilities

Year	Cost in Mln Rs.
1991	785
1992	677
1993	597
1994	489
1995	423
1995-96	393
1996-97	136
1997-98	260
1998-99	189
1999-00	155

 

SPONSOR’S CONTRIBUTION

The continuing success of ACPL is largely due to full support of Sponsors who have always acted in a way that demonstrates their resolve and total commitment to provide whatever financial and other support necessary to make the project a success and ensure its full potential realization. The exemplary cohesion/commitment of its experienced and competent Management Team and participative system of management has helped to motivate all categories of staff to give their best for the overall benefit of the company.

 

ACPL: STRATEGIC ANALYSIS

In this section we will access the performance of Attock Cement Pakistan Limited, based on SWOT Analysis. After that we shall review the current strategies and will propose new ones that Attock Cement Pakistan Limited should adapt. Lastly we shall be discussing the process and guidelines in order to implement the new strategies.

MISSION STATEMENT

The company has a formal mission statement written in its Annual report. The statement is:

“To be a premier and reputable cement manufacturing company dedicated to become industry leader by producing quality products, providing excellent services, enhancing customer satisfaction and maximizing share holders value through professionalism and dedicated team work.”

In this mission statement they have highlighted their primary business, their vision to become industry leader, their concern for their product quality and services, their concern for customer satisfaction and for their share holders and employees. Among their employees, they focus on qualities of professionalism, dedication and team work.

For their future vision the company aims at becoming the industry leader by excellence in their products and services.

PROBLEM

As mentioned in Analysis of Cement Industry, short-term future outlook of the industry is not attractive at all and the following are some of the main problems faced by the Attock Cement Pakistan Limited.

• Gap between Production and Sales is too high. More cement is being produced then the market demand.
• Since 1998, the production has been reduced by 50% – 60% level of original capacity, If full capacity of plant is utilized than it can be more beneficial for the company.
• Competition in the cement market is very intense, and it has become buyer’s market, as supply is much higher than the current demand.
• Prices of inputs such as furnace oil, gas and electricity are continuously increasing. This is making the process of cement manufacturing even more difficult.

OBJECTIVES

Following are the objectives for strategic analysis:

• To identify new markets to sell the cement
• To lower the production costs
• To identify how profitability of the firm can be improved in future.

 

INTERNAL ASSESSMENT

STRENGTHS: Following are the major strengths of the company

1. Strong Support from the Sponsors: Sponsors of this project are foreign concerns. They have made number of investments in Pakistan including Attock Oil Refinery, Attock Chemicals and Attock Industrial Products. They also plan to invest in more projects in Pakistan. In this project, the investors have demonstrated their full support financial as well as participative in order to lead the company towards the success stories.
2. Professional Management: Management of Attock Cement Pakistan Limited is experienced and renowned for their professional excellence. Each operational and functional division of the company is headed by highly qualified professionals with well over 15 years of relevant experience in their particular field. The management team has first time in Pakistan successfully operated Pre-calcination and pre-heating technology introduced by Attock Cement Pakistan Limited.
3. Premium Brand: “FALCON CEMENT”, name of Attock brand Cement Pakistan Limited is recognized throughout the country because of its high quality. In has very advertised its brand and the logo better than its competitors. It is the only company in the industry which is advertising its brand aggressively in print-media, billboards and also on electronic media.
4. Better Operational Planning and Optimization: The production capacity of the plant was increased to 700,000 metric tons after optimization and de-bottlenecking completed in April-June 1994, which was originally 600,000 metric tons. It was made possible only because of the intensive optimization of processes. By using better operational planning and grinding aids the company has been able to achieve the target of 800,000 metric tons of production, which was impossible from previous processes and operations.
5. Product Innovation: Attock Cement Pakistan Limited is continuous success is attributable to its policy of innovation, flexibility and Introduction of new products and services to satisfy market demand. The superior and consistent quality of its products which have been tested time and again by respected consultants and contractors at internationally known laboratories around the world have influenced them to prescribe the use of FALCON brand products for highly prestigious, internationally funded supervised project of National Importance.

Attock Cement Pakistan Limited has also test produced pure slag, limestone cement, masonry cement and a high value product, oil well cement, which is presently being imported but would become possible to produce locally by Attock Cement Pakistan Limited after the additional cement mill which has been set up and additional silos become available.

6. Quality of Raw Material: Another strength of the company is easy availability of raw material used in the production of cement. The primary raw material which is used in this process is limestone. A limestone deposit of very high quality exists about three kilometers from the crusher. The limestone quarry development but fortunately a large quantity of conglomerate limestone has been found to be available in the shale quarry. This is a ready-mix for cement manufacture and does not involve quarrying and blasting and as such it is being used as a raw material at considerable savings to Attock Cement Pakistan Limited.
7. Employee Commitment: Attock Cement Pakistan Limited is an enlightened employer. It has a number of policies to reward the employees for their above average performance. It also take care of training of its employees in order to develop their skills that help them through out their career. For the essential staff who are required to stay on factory premises, there is well laid out residential estate with air-conditioned mess, with eight suites and a number of bungalows for officers and family quarters for workers. These facilities has been provided in order to boost employees’ morale and make them committed to the organization.
8. Development of Hub Area: Hub (Blauchistan) at one time was a completely barren place where no mechanized vehicles had ever entered and which lacked all basic amenities such as water, electricity, gas or drainage. Attock Cement Pakistan Limited has laid a seven kilometer long water pipeline, financed construction of a fifty two kilometer long gas supply network, paid for twelve kilometer of electric transmission lines apart from construction of over eight kilometer of access road and culverts.
9. Improvement in Debt-Equity Ratio: In 1995-96, debt-equity ratio was 62:38, which has continuously gone down due to payment to installments of long term debt. It has now reached the level of 40 percent debt and 60 percent equity, which is a remarkable achievement on the part of management.

WEAKNESSES: Following are the major weaknesses of the company

1. Ageing of Plant: Attock Cement Pakistan Limited has now entered fourteenth year of its operation and some areas have now started to show signs of ageing and fatigue which need to be regularly monitored and possible replaced to ensure reliable operations. Despite the replacement of a number of crucial equipment, substantial portion of the plant remains that of Romanian origin and regular maintenance and replacement of parts is required to avoid undue stoppage of operations.
2. Restricted Market due to location: The plant is located at Hub in Blauchistan which is far from the urban area, as compared to other cement factories. Moreover, it cannot capture the market of North including a huge market of Punjab.
3. High Transportation Cost: The company has to pay high transportation cost for both transportation of its employees from Karachi to Hub and back. Also cost of transportation of finished bags of cement back to Karachi is high. It is not feasible for the company to supply cement to Punjab and other Northern areas.
4. Utility Crisis: Attock Cement Pakistan Limited continuously facing utility crisis. Load shedding and fluctuation in voltage are harmful for the equipment in cement plant. The plant has spent large amount of money in plant repairs and maintenance work.
5. Wastage of Resources: There had been misuse of electricity and other resources in factory. Even many people prefer to stay overtime even when they are not needed. This adds to additional operational costs for the factory.

 

EXTERNAL ASSESSMENT

OPPORTUNITIES: Following are the major opportunities lying in front of Attock Cement Pakistan Limited

1. Economic Revival of Country: Due to political instability in the country, the business had been in slump. After nuclear blast of 1998, all the foreign accounts were frozen, western countries also stopped providing their aid to Pakistan.

By now, the conditions have stabilized, and businesses are reviving. It is expected there will be more economic activity in the country. More construction projects will be started in the country, that will definitely boost the cement demand in the country.

2. Lower Interest Rates: The financial institutions have also lowered the interest rates on the loan provided to Attock Cement Pakistan Limited. This has made possible the high degree of investment possible in the industry and increased the profitability of the company
3. Large Government Projects: Government intend to start new development projects including construction of roads, dams, housing schemes etc. This will generate demand of high quality or specialized products that Attock Cement Pakistan Limited can provide.
4. High Population Growth: Pakistan has one of the highest population growth rates in the world, touching 3%. This has prompted a sizable demand for housing facilities in the country. According to estimates of construction industry, there is a huge backlog of about 6.25 million housing units in the country. Bulk of the current demand of 0.6 million units needed every year is for urban areas. With greater urbanization the demand for cement is expected to grow at an average of nearly 7% per annum.
5. Export of Cement: The federal government’s decision to allow export of clinker and cement by the private sector has been eclipsed due to absence of necessary rules and regulations. The export consignment of clinker by a unit was delayed as the customs authorities refused to allow export. The federal government on August 13 issued a notification which stated “Export of cement and clinker will be allowed by sea on such terms and conditions as may be notified by the ministry of commerce.

 

THREATS: Following are the major Threats that should be Attock Cement Pakistan Limited aware of:

1. Uncontrolled rise in installed Capacities: In last 3-4 years there new plants being established and existing plants are undertaking expansion, the demand-supply equation is bound to create surpluses.
2. Slow economic growth: In last few years the economic growth has be too slow. Although governments has launched number of economic development projects but most of them has been unsuccessful due to slow economic growth and political instability in the country.
3. High utility costs: Cost of utilities like electricity and gas are rising exponentially. This has posed great threat to all the industries in the countries. Especially cement industry require a very large volume of electricity and gas in its manufacturing processes.
4. Rising cost of Furnace Oil: In 1995, cost of furnace oil was Rs. 3,000 per metric tons. Now in 1999-2000 it has raised to Rs. 11,132 per metric ton. Hence in only five years cost of furnace oil has raised 370 percent. In future as well, it is expected that cost of furnace oil will rise even in near future.
5. Plants in Tax Free Zones: New cement plants have been set up in Tax Free Zones such as Hattar. Government of Pakistan has been treating Attock Cement Pakistan Limited differently as compared to those plants in Tax Free Zones. Customer can purchase cement manufactured by those plants cheaper than the prices set by Attock Cement Pakistan Limited.
6. Price War: Due to over production in the market and low demand, it has become buyer’s market. Other manufacturers are selling at very low costs to compete with each other and a price war has started. Attock Cement Pakistan Limited cannot reduce price of cement due to its high quality of cement.

 

CURRENT STRATEGIES

Product Development: Attock Cement Pakistan Limited has test produced Pure Slag, Limestone Cement, Masonry Cement and a high value product Oil Well Cement. The oil well cement is presently being imported but would become possible to produce locally by Attock Cement Pakistan Limited, after the additional cement mill has been set up and additional silos will become available.

Attock Cement Pakistan Limited is producing and supplying to large internationally funded projects a superior quality of falcon aggregates and is actively considering collaboration in downstream based activities such as block making, dry ready-mix, concrete, pre-casting.

Differentiation on quality: The company has differentiated its cement in the market by providing superior quality of cement. Although there is an intense competition in the market, but Attock Cement Pakistan Limited has distinguished itself in quality conscious market segment. Although current price of a bag of cement in the market is around rupees 170 to 180 but still Attock Cement Pakistan Limited has priced its FALCON CEMENT brand at rupees 230.

Conglomerate Diversification: The Pharaon Group has multiple projects established in Pakistan. They include Attock Cement, Attock Chemicals, Attock Oil Refinery and Attock Industrial Products. So the group has invested in number of industries. Even if there is a slump in cement industry, all the investment of the manufacturer will not be effected.

Cost Cutting: The company is aggressively looking into areas where they can cut there operating costs. Following are some of actions management has taken to cut the operational costs:

1. Employees are not allowed to work overtime if there is no urgent need.
2. Awareness is created among employees to avoid electricity and gas wastage.
3. Management focuses on proper human resource allocation, and try to use only the right number of workers to work on a job.

Plant Rehabilitation Plan: Management has a plant rehabilitation plan, that will be used to improve the performance of the plant. Management want to carry out this plant rehabilitation program in next three years. Details of this plan are provided in previous section.

Process Optimization: Due to increased demand for cement in country a plant optimization program was carried out in 1994 that result the clinker production capacity increased from 2000 tons per day to 2400 tons per day.

Focus (Niche Strategy): The company concentrates on niche markets. It look forward for large projects from government and private sector. For example, construction on airport runway, Ghazi Brotha Dam, Extension project of Quaid-e-Azam’s Tomb, All construction projects of DHA.

 

RECOMMENDED STRATEGIES

 

1. Market Development: Attock Cement Pakistan Limited should focus on developing penetrating into new markets. FALCON CEMENT is a successful product, popular for its high quality. Now the company should find penetrate into new markets to sell the product. In Karachi (South), Falcon Cement has 47 percent market share, so it should now penetrate into the market of North. This contains a vast area of Punjab and NWFP. There is a great potential and demand of cement in this area. Based upon high quality and premium brand the company can penetrate into this market.
2. Market Development: There is a great demand for export of cement in countries like Bangladesh, Srilanka, Syria, Myanmar, Lebanon, Singapore, Hong Kong and Vietnam. Attock Cement Pakistan Limited can target the markets of these countries and can look forward to export cement and hence increase its production level. There is a potential import level of 20,205 million tons in the countries mentioned above.

• Product Differentiation: The company should continue its product differentiation strategy. It should project its brand as a symbol of quality. High quality raw material is a great strength for keeping the image of their product high.

 

STRATEGY IMPLEMENTATION

The company should undertake following steps to implement the above mentioned strategies:

1. In North the company should penetrate into the market through image building of their product. They should use advertising to build the image of their product. High margins should be given to the dealers to push the product in the market. Although there are many players in the market, but Attock Cement Pakistan Limited can compete with them based on quality.
2. There is no sole distributor in Punjab, the company should appoint one distributor in that sector, or in other case it should open its own marketing office in Punjab.

• Price of Falcon Cement is too high. (Rs. 230 per bag as compared to Rs. 180 to Rs. 190 for other brands). Although quality of FALCON CEMENT is better than other cements, but still it must consider lowering its price as this market has completely become buyer’s market and buyers may prefer other brands based upon price edge.

2. Attock Cement Pakistan Limited should consider to again enter into export market. Although in 1998 the company exported 2000 tons of clinker to Bangladesh at this time government also offered a rebate of Rs. 900 per ton. But still the company has not recovered its Rs. 2.5 crore of this export deal. Disheartened from this loss Attock Cement Pakistan Limited decided not to take further risk of exporting cement.
3. In order to export cement, All Pakistan Cement Manufacturers Association or the cartel of cement manufacturers should take a combined step and must take this matter to the government officials. The association can ask the government to consider there following demands:

• 50 percent rebate on freight of cement since cement / clinker are non-traditional export items.
• Duty and surcharge drawback should be allowed on all production inputs.
• Allow export of cement by road to target the markets in Afghanistan and Central Asia.

1. Make the operations more efficient and improve the Gross Profit Margin of the company.

• Consider possible use of coal in some of the operations in place of furnace oil and gas, as coal can be a cheaper substitute of uncontrolled price hike of electricity and furnace oil.
• Develop IT culture in the organization and improve efficiencies of the operations by exploiting the potential of IT and using enterprise resource planning systems for achieving effeciency.

1. Do not invest too much in plant rehabilitation program until the market position becomes favorable. As additional investments may prove to be complete wastage if the market demand remains slump.
2. The company is studying the feasibility of installing its own power plant. If feasible, then this can reduce the problem of high costs of furnace oil and electricity.

 

APPENDIX A: ARTICLES

 

CEMENT COMPANIES FIND IT TOUGH

 

Conditions for the local cement industry appear to be far from ideal and while we are looking at a surplus because of capacity increases a slump in demand seems to be an added threat

 

By Khurram Baig

Dec 15 – 21, 1997

 

The cement sector has become extremely competitive over the last five years and while at one time this was a booming industry where money was to be made, companies are not finding it hard to keep their heads above the water. As margins are slashed there is an intense need to cut down on production costs and other peripheral expenses which leaves plants incorporating the dry process at a distinct advantage. However even companies relying on the dry process as opposed to the wet process are finding the going a little hard and the economic conditions not to their liking.

 

With annual increases in fuel, power and gas prices, input costs have been increasing at a steady rate, specially because of the increase in power rates which in Pakistan are relatively higher for the industrial sector than the residential consumers. Apart from that, the increased production volumes in the country with a less than projected increase in demand has changed the outlook for the industry.

 

With the export of cement a possibility that is still being explored many of the companies are gasping for breathing space. There are fears that if conditions do not improve some companies might have to close up shop. The ones still using the wet process appear to be the most vulnerable.

The results

 

We have the latest earnings results of three companies from this sector, two using the wet process and one using the dry process and while it is clearly evident that all of them have been hit by the current slump. the plight of the wet process companies is much more serious. It is not really surprising considering that the input costs for dry process companies are much higher such that both the companies we will be reviewing, Mustehkam Cement and Gharibwal Cement have suffered substantial gross losses. Their sales are not sufficient to cover the cost of sales alone, let alone all subsequent expenses.

 

Mustehkam Cement saw a drop in sales figures for the year ended June 30, 1997 which fell from Rs 1.14 billion to Rs 926.9 million despite the fact that the price of cement has increased over the year. This indicates a drop in volume sales as well. The company suffered a gross loss of Rs 86.8 million whereas it had earned a gross profits of Rs 14.4 million last year.. Even though related expenses like financial charges, administrative and marketing expenses and provision for tax was much lower this year, the company suffered a substantial loss of Rs 184.5 million after tax compared to a profit of Rs 22.8 million last year. The company now has accumulated losses of Rs 181.8 million rupees and this is a sudden drop from its performance in the previous year. This leads one to believe that perhaps the industry is no longer economically viable for some of the performers in the industry. Mustehkam has not announced any dividend this year either whereas it had last year but consider the sudden reversal in its fortunes this is not really surprising.

 

Similarly Gharibwal Cement which is also based on the wet process has suffered a tremendous reversal of its fortunes this year. Even though its sales increased marginally for the year ended June 30, 1997 from Rs 1.46 billion to Rs 1.466 billion, there was a tremendous increase in cost of sales from Rs 1.336 billion to Rs 1.65 billion. Therefore, last years gross profit of Rs 124.4 million was converted to a loss of Rs 190.3 million this year. The company did well to curtail its operating expenses though and through a reduction in general and administrative charges which dropped from Rs 61.7 million to Rs 38.1 million, total operating expenses fell from Rs 82.7 million to Rs 56.35 million. But this was like a drop in the ocean and failed to save the company from going into the red. Operating profit last year was Rs 41.6 million. This year the company suffered an operating loss of Rs 246.6 million. Other income was less than 50 per cent of what it was last year at Rs 20.2 million but taxation for the year was just about a third of what it was in the previous fiscal year, falling from Rs 64.9 million to Rs 22.3 million. The damage however in both Mustehkam Cement and Gharibwal Cement had been done at the manufacturing stage and Gharibwal Cement suffered a loss of Rs 247.66 million after tax compared to a profit of Rs 24.3 million last year, a small profit but a profit.

 

It is clear that the problem lies in the manufacturing stage and the only answer is that the companies change from the wet process with is very expensive to the dry process. A lot capital is required for this because the machines cannot be converted, from the wet to the dry process, the plant has to be replaced. This is certainly not an easy task, one that will need a lot of careful planning.

 

And the biggest deterrent here is that who is to say that once the companies have shifted from the wet to the dry process, they will start to make money.

 

DG Khan Cement uses the dry process but they have not done that well this year either.

 

The sale figure fore the year ended June 30, 1997 fell from Rs 1.54 billion to Rs 1.34 billion which again indicates a fall in volume sales. Cost of sales again rose substantially considering that sales have dropped and increased from Rs 955.6 million to Rs 1.07 billion. However, wile, unlike the two companies that we have already discussed, the company does not suffer a gross loss, gross profits were more than halved from Rs 591.4 million to Rs 274.7 million.

 

The trend is almost exactly the same, the only difference is that DG Khan Cement has not yet gone into the red but if the slide is not stopped DG Khan Cement could very well record an after tax loss in the coming year.

 

Operating expenses were brought under control and fell from Rs 242.8 million to Rs 194.8 million with falls in selling, distribution and administrative expenses. Other income was reduced by about 50% and operating profit for the year was just a little more than a quarter of what it was last year at Rs 127.2 million.

 

The figure would have been much worse but for the fact that financial charges were brought down to a third of last year at Rs 43.65 million and taxation was about 20% of what it was last year at Rs 12.1 million. DG Khan Cement, despite these lower expenses also could not wipe out the effects of the fall in earnings at the manufacturing level and registered after tax earnings of Rs 71.5 million, compared to Rs 248.4 million last year.

 

This clearly indicates that the biggest problem in the industry is that sales are not enough to cater to fixed costs and therefore companies are struggling.

 

Either the companies still running on the dry process need to make the shift or the management will soon have immense liabilities and possible sick units on their hands.

 

But be it the wet process or the dry process, until and unless the demand for cement picks up or a viable export option is realized, the industry will continue to lose ground. The only answer is a dramatic increase in industrial growth.

 

 

THE TROUBLED CEMENT INDUSTRY

 

Can a manufacturers cartel ensure capacity utilization?

 

By SHABBIR H. KAZMI

Nov 23 – 29, 1996

 

The cement industry in Pakistan has come a long way since independence when the country had less than half a million tonnes per annum production capacity. By now it has exceeded 10 million tonnes per annum as a result of establishment of new manufacturing facilities and expansion by the existing units. Privatization and effective price decontrol in 1991-92 heralded a new era in which the industry has reached a level where surplus production after meeting local demand is expected in 1997.

 

The cement industry in Pakistan faces two serious threats: closure of units based on wet process, and poor cash flow rendering the units incapable of debt servicing due to increasing cost of electricity, furnace oil and imported craft paper used for cement packing. The cost of furnace oil alone has increased by nearly 100% in the last 15 months alone. With the increase in furnace oil the increase in electricity tariff has also become inevitable.

 

Pakistan has remained a net importer of cement but due to the privatization of units operating under state control and subsequent expansion programmes by the new owners supported by financial has pushed the industry to a point where the country is bound to reach an oversupply situation. However, the recent increase in energy cost provides opportunity for the efficient units based on dry process to sustain the situation for a relatively longer period. It would also be possible because the expansion by the existing units and establishment of new units are being delayed.

 

Pakistan’s cement market is divided into two distinct regions, North and South. The northern region comprises the Punjab, NWFP, Azad Kashmir and upper parts of Balochistan, whereas the southern region comprises the entire province of Sindh and lower parts of Balochistan. Traditionally, the southern region has always been surplus in cement production but with the establishment of more plants in the northern parts of the country the region has become almost self-sufficient in supply of cement.

 

Demand vs supply

 

The demand-supply gap which for the last decade was in favour of manufacturers is now set to switch the other way with supply outpacing demand by the end of 1997. Historically, demand has grown at an average rate of 7%, with the Northern region averaging 8% and Southern region lagging behind at 4%. There is much pessimism about the industry’s future due to a tremendous increase in supply expected by the end of next year.

 

The way new plants are being established and existing plants are undertaking expansion, the demand-supply equation is bound to create surpluses. However, it has been observed that actual progress is slower than planned to avoid a possible glut situation. This will effectively narrow down the gap between demand and supply and thereby ease the pressure on prices.

 

• Factors which can possibly change the surplus position into a near-equilibrium between demand and supply are:-
• Formation of manufacturers’ cartel to avoid price decline;
• Delay in implementation of planned additions and expansions;
• Efforts to export cement; and
• Increase in demand if construction of some of the mega-sized infrastructure projects starts

 

More competition

As the cement market is moving from a virtual ‘sellers’ market’ to an over-supply situation, it is expected that when prices stagnate and profitability becomes a function of volume and economies of scale, locational advantage and proximity to markets will become extremely important factors.

 

At present the freight charges are a massive 20% of the retail prices. The plants located very close to each other and tapping the same market will have to expand their markets which will increase their freight expenses.

 

Dandot, Pioneer, Maple Leaf and Garibwal are all located within a radius of 100 kilometres and are selling bulk of their production in the same areas and will thus face serious competition from each other.

Positive side

 

Pakistan has one of the highest population growth rates in the world, touching 3%. This has prompted a sizable demand for housing facilities in the country. According to estimates of construction industry, there is a huge backlog of about 6.25 million housing units in the country. Bulk of the current demand of 0.6 million units needed every year is for urban areas. With greater urbanisation the demand for cement is expected to grow at an average of nearly 7% per annum.

 

The demand for cement for infrastructure units is expected to grow with the commencement of work on motorways, power plants, Islamabad New City, Karachi Package and Ghazi Brotha dam. If all these projects are implemented as per schedule, the demand for cement is expected to grow at a higher rate.

 

Tax structure

 

Instead of providing any relief in the budget, the sector was further penalized with a 3% increase in sales tax to 18% and an increase in excise duty to 35%. So far, the manufacturers have been able to pass on the increase to consumers but the situation is unlikely to continue. However, the possibility of formation of a cartel cannot be ruled out. Since massive investment has been made in the sector, any reduction in price of cement can reduce profit margins of all the units.

 

Formation of cartel and fixation of price at a level high enough to cover increasing costs of inputs and ensure reasonable profit margins may provide a short-term relief to the manufacturers. Such a cartel may be against the interests of consumers but can help the manufacturers to survive with some dignity.

 

Formation and smooth operation of a cartel is generally difficult but in the case of cement industry it may not be so because the only restriction could be on the level of capacity utilization along with a modest uniform reduction in price of cement. However, the units are in diverse states of financial health, enjoy different levels of competitive advantage, and therefore need different prescriptions to maintain their profitability.

 

Production process

 

Each tonne of cement requires about 1.7 tonne of limestone, gypsum and silica, etc. By volume limestone accounts for about 80% and clay 19% of the intermediate product — clinker. Gypsum is later on added to clinker in the ratio of 4:96 to obtain cement. Pakistan has all these raw materials in abundance and the country can feed these material to existing cement plants for more than 100 years. This ensures both cheap and smooth supply of raw materials but proximity to raw materials supply is not a major competitive advantage.

 

Production of cement is a continuous process. Raw materials are dried, ground, proportioned and homogenised before being burnt in rotary kilns. The resulting material ‘clinker’ is pulverised with gypsum at the grinding stage to obtain cement.

 

The cement industry in Pakistan uses two distinct production processes, the ‘dry’ and the ‘wet’ process. Both the processes use different types of kilns. In the wet process raw materials are fed into kiln in slushy form. As it consumes more energy to raise the temperature of the kiln to the required levels it is costly. In the dry process the ground raw materials are fed into the kiln in dry powder form therefore energy consumption is low to raise the temperature to the required level.

 

Cement plants established in Pakistan upto the seventies were based on wet process whereas the plants established in the eighties and onward are based on dry process. These include the plants established by the SCCP and the private sector. As of June 1995, 60% of the production capacity was based on dry process which has further increased as the newer units are also based on dry process.

 

Cost of production

Since the industry faces a situation where sales price will be fixed by mutual consensus, the cost of production will be the most critical factor of profitability. Energy cost is a major component of total cost of production. It contributes at an average 40 to 45 percent towards total cost of cement production. Energy cost is even higher in case of those plant which use wet process. A cement plant based on wet process consumes 165 kg of furnace oil to produce one tonne of clinker as compared to 85 kg of furnace oil used in dry process to produce the same quantity of clinker. Since cement plants use both furnace oil and electricity, any increase in the prices of these two products is detrimental to profitability of the industry. Ever since October 1995, however, there has been more than 60% increase in the price of furnace oil.

 

Another significant cost component is packaging material. Cement is rarely sold in bulk in Pakistan — almost all cement sales are in four-ply papersacks. Cost of papersacks has gone up by almost 90% since December 1994. Only one unit, Cherat Cement, has the advantage of having an associate company producing such bags.

 

Key players

 

Until recently there were 24 cement manufacturing units in the country which were reduced to 23 with the closure of National Cement’s Karachi unit. Out of these, 2 units produce white cement, one slag cement and the remaining produce ordinary Portland cement (OPC).

 

Cherat Cement located in NWFP has an installed capacity of 0.72 million tonnes per annum. Cherat was the first cement plant in the private sector to commence commercial operations (1985) after the end of state monopoly. Its main markets are NWFP and upper Punjab. The company is owned by Ghulam Faruque group which also owns Cherat Papersacks.

 

The company has recently doubled its capacity and expansion has come at an appropriate time. It is in a position of taking advantage of the ‘cement hungry northern region’ for capacity utilization. Expansion also provides potential of achieving economies of scale. Given Chreat’s established marketing base it could be the immediate beneficiary if export of cement to Afghanistan is allowed — the country needing massive reconstruction after devastation of a long war.

 

However, commencement of commercial production by Lucky and Army Welfare plants may create over-supply even in the Northen region. Cherat will have to spend more on transportation cost as it will have to tap distant markets to sell production from expanded capacity. Constant increase in fuel prices will add to total transportation expenses of the company in a substantial way — currently the freight cost comes to more than 20% of retail prices of cement.

 

D.G. Khan Cement was the most prized unit out of the cement units privatised by the Nawaz Sharif government. Of all the plants owned by the SCCP it was the most modern plant with bulk of depreciation amortised and interest charges paid for. The company enjoys a virtual monopoly in its sales territory. There is no other cement plant within a radius of 400 kilometres. The current capacity of 720,000 tonnes per annum (TPA) is being enhanced to 1.809 million tonnes at a cost of Rs. 6 billion. The IFC is also participating in the project with a loan component of US$ 65 million and equity worth US$ 5 million.

 

The expansion will come on line at a time when there will be supply overhang in the industry. With margins coming under pressure it will have to bear the added brunt of higher financial charges and increased depreciation cost in the years to come.

 

Analysis of the latest half-yearly results of the company shows that although sales of the company have gone up by 3.5%, the increase in cost of sales has reduced gross margin from 61% to 48%. With rising inputs cost not being matched by similar increase in price of cement, margins are expected to shrink further. The company, after the expansion is expected to face fiercer competition from Zeal Pak, Pioneer, Dandot and Wah. To wrest market share from the competitors, it is likely that D.G. Khan will have to reduce its cement prices.

 

Dandot Cement, privatised in 1992, was able to wipe off its accumulated losses by the end of its first financial year after privatisation. Dandot has increased the plant capacity from 1000 tonnes to 1600 tonnes per day, through an optimization programme completed in July1995.

 

The Chakwal Group, which acquired management control of Dandot Cement, is setting up another cement plant, Chakwal Cement — the largest cement plant in the country. This will give the Group control over 2.3 tonnes per annum production. The decision to set up another plant in the same vicinity could go both ways. On the positive side it could provide leverage to out-price competitors especially as the industry moves towards a possible over-supply situation. Chakwal Cement is located close by a motorway to be constructed which provides it an opportunity to market its cement in large quantities to the project.

 

On the negative side, Dandot is a highly unionized concern and suffers from a strained labour-management relationship which has led to plant closure in the past. In addition, the investors are losing confidence in the Group mainly due to delayed commencement of its much-talked about Dhan Fibres project.

 

Cement export

 

The federal government’s decision to allow export of clinker and cement by the private sector has been eclipsed due to absence of necessary rules and regulations. The export consignment of clinker by a unit was delayed as the customs authorities refused to allow export. The federal government on August 13 issued a notification which stated “Export of cement and clinker will be allowed by sea on such terms and conditions as may be notified by the ministry of commerce.

 

Since consumption of cement in southern region has gone down and northern region has attained self-sufficiency, units located in southern region are forced to cut down their capacity utilization. The possibility of cement export is the proverbial silver lining for the recession-torn industry according to analysts at AKD Securities While there are cement deficient countries like Bangladesh and Sri Lanka importing approximately 2 million tonnes per annum each, there is tough competition from India and Chinese suppliers.

 

In fact, apart from the prices offered by Pakistani manufacturers, lack of facilities for handling bulk export of cement has become a major impediment — bulk handling is cheaper than handling bagged cement.

 

Export of cement is necessary for the existence and survival of the industry rather than a source of profit. The announcement of policy on cement export has created positive sentiments.

 

Future outlook

 

At the current point cement manufacturers and the government have to take concrete steps even to keep units in production. On the inputs side, necessary steps are required to contain the increasing energy cost. The government must also look into the case of providing subsidy on freight to the exporters of clinker and cement. The prescription is to optimize capacity utilization.

 

According to analysts the future of cement exports depends on two factors: surge in cement prices in the export markets and the government of Pakistan subsidising freight charges. While the quantity of exportable cement in the region would gradually decline and prices are expected to increase, it will take time to get a favourable decision from the government to provide subsidy even on freight cost. But absence of bulk cement handling facilities will remain a major deterrent.

 

Lucky cement which completed its construction at a fantastic speed to qualify for duty exemptions has met the fate apprehended by the industry experts. Due to various technical problems including sinking of some foundations, the management was forced to close down the production soon after starting commercial production. It is feared that it would not be able to resume production till the first quarter of the next calendar year.

 

But prospects of recovery of cement industry have been further reduced due to another recent increase POL prices. Electricity tariff is also expected to be revised upward shortly. The advantage of devaluation has been eroded almost completely due to increase in energy cost.

 

Historical perspective

 

The history of cement industry in Pakistan dates back to 1921 when the first plant was established at Wah. At the time of independence in 1947 there were four cement factories with an installed capacity of 470,000 tonnes per annum. These units were located at Karachi, Rohri, Dandot and Wah. In 1956 Pakistan Industrial Development Corporation (PIDC) established two plants at Daudkel and Hyderabad and subsequently more plants were established in the private sector.

 

The industry was nationalised in 1972 and the State Cement Corporation of Pakistan (SCCP) was established following the Economic Reforms Order, 1972. As a result of nationalisation, a total of 10 cement units with an installed capacity of 2.8 million tonnes per annum were transferred to the SCCP. Effective price control was also vested with the SCCP and for a long time the industry operated under a regime of strict regulation and price control. While the cement industry was working under state control, the SCCP established five new units with an installed capacity of 1.8 million tonnes per annum.

 

In 1985-86 the cement industry was deregulated and private sector was allowed to establish cement plants. But bulk of the capacity was controlled by the SCCP which had effective control in the fixation of prices. Severe shortage of cement and price deregulation prompted the private sector to establish more plants. Seven units were established in the private sector before commencement of the process of privatisation in 1991.

 

During the regime of Nawaz Sharif the industry went through major transformation. The government embarked upon an ambitious privatisation programme and eight units have been privatised so far. The SCCP at present controls less than 25% of the total installed capacity in the country which is shrinking with the establishment of more plants in the private sector and expansion in the privatised units. The units working under the SCCP control are old and inefficient using ‘wet process’ whereas the units established in the private sector are new, efficient and use ‘dry process’.

 

Cement manufacturing is a high capital- and energy-intensive industry. The capital cost of a 2000 tonnes per day (TPD) plant ranges between Rs. 3.5 billion to Rs. 4 billion whereas the capital cost of a 3000 TPD plant is estimated at more than Rs. 5.5 billion. Energy consumption by cement manufacturing units based on ‘wet process’ is higher than ‘dry process’. The ‘dry process’ is estimated to be economical by 40% to 50% compared to ‘wet process’.

 

Installed capacity

 

Cement Plants in Northern Region         (000 tonnes) per annum

1) Associated (Wah)                                    900

2) D.G. Khan                                                  1,710

3) Cherat                                                     720

4) Pioneer                                                    660

5) Mustehkam                                                  660

6) Fecto                                                      600

7) Kohat                                                      330

8) Gharibwal                                                  540

9) Maple Leaf                                                 1,460

10) Dundot                                                    480

11) Lucky Cement                                       1,200

Sub-Total                                                     7,580

Cement Plants in Southern Region

12) Zeal Pak                                                  880

13) Attock                                                    660

14) Javedan                                                   500

15) Pakland                                                   540

16) Dadabhoy                                                  450

17) Thatta                                                    280

18) Associated (Rohri)                                        230

19) Essa                                                      150

Sub Total                                                     3,690

Cement Plants Under Construction

20) Saadi                                                     960

21) Lucky                                                     1200

22) Army welfare                                       660

23) Fauji                                                     900

24) Chakwal                                                   1,650

Sub-Total                                                     5,370

Grand Total                                                   16,640

Lucky Cement

 

Lucky Cement is a 1.2 million TPA greenfield project based on dry process. Plant and machinery has been supplied by China — the biggest Chinese plant outside China. It is located near Pezu village in NWFP and enjoys sales tax exemption until year 2001 — a unique competitive edge apart from having the lowest project cost among upcoming cement plants. Lucky Cement also holds 100% equity of Lucky Powertech which would supply power to the cement plant upon completion.

 

While Lucky’s advantages include sales tax exemption, nominal financial charges — it is almost totally equity-based — the possible risks are: location in a remote area which would result in higher transportation cost of cement, spread over a huge equity-based EPS would always be low and reservations about Chinese technology.

 

Lucky completed its construction at a frantic speed to qualify for duty exemptions but the apprehensions expressed about the structure came true. The unit was closed down soon after commencement of commercial production due to technical reasons including sinking of some strategic foundations. It is feared that it would not be able to resume production for another three months.