The construction industry is very important for country’s economic growth, infrastructure development and employment generation. The industry trains manpower not only for meeting the country’s domestic requirements but also the needs of foreign markets. The construction industry and cement are intertwined in a way that neither can survive without the other. Cement is always considered as a barometer of progress in the developing countries and is rightly taken as an important economic activity indicator.
Cement consumption is considered to be major source of economic growth, development and economic activities which plays a key role in generating income in both formal and informal sectors by offering job opportunities to millions of unskilled, semi skilled and skilled workforce. It is the driving wheel of the construction industry which plays a pivotal role in the socio economic development of a country by providing infrastructure, sanctuary and employment by setting up a network of hospitals, schools, township, offices, houses and other buildings: urban infrastructure (including water supply, sewerage and drainage); highways, roads, ports, railways, airports, power stations; irrigation and agriculture systems including dams and telecommunications. It generates a substantial employment and provides impetus to other sectors through backward, forward and parallel linkages.
The prolonged recession of recent years and drying of government development programs have played havoc with viability of cement sector. Capacity utilisation of cement sector reached its lowest – at 69.67 per cent – of the past decade, in the first two quarters of 2011-12 that ended on December 31, 2011. Whereas, exports continue to decline and in turn offsetting the gains in local consumption. All Pakistan Cement Manufacturers’ Association sources say that cement industry did not end the year 2011 on a happy note as the capacity utilisation of the industry stood at 81.53 per cent in 2007-08 that has gradually declined to its present level, giving nightmares to the cement manufacturers. The expected turnaround in the economy did not materialise as the capacities of the sector continue to increase.
It is to be noted that domestic demand in December 2011 was encouraging, showing a growth of over 13 per cent. This compensated to some extent the decline of 5.12 per cent in local demand in November. However, the exports remained under pressure during the last six months posting decline in four of the last six months. Statistics shows that exports declined by over eight per cent in December. Overall decline in exports stood at 4.58 per cent during July-December 2011 period. Total cement dispatches in the first two quarter of this year was 15.40 million tonnes which was 4.21 per cent higher than the cement dispatches of 14.78 million tonnes during corresponding period last year.
Manufacturers complain that low gas pressure is causing plant tripping as well as production losses to industries. The situation, unfortunately has now exacerbated, deficient gas pressure is causing further production losses to industries which already observed two days shut down. All this is translating into escalating financial losses and threatening the survival of many industries.
Contrary to the claims of manufacturers, who are constantly trying to portray the condition of cement sector as worse through jugglery of data, the cement sales in Dec 2011 have jumped by 18.1 per cent with domestic sales skyrocketing by an impressive 23 per cent. Experts said that the cement cartel is continuously demanding the government to provide it subsidy or payment of inland freight as the sector’s sale is either going to downward or it is stagnant. According to experts, the cement sector also availed the relief in last budget 2011-12 when the FED was reduced from Rs700 per tonne to Rs500 per tonne, GST was reduced by one per cent and the Special Excise Duty was abolished. Hence, the impact of these measures amounted to over Rs30 per bag but it was not passed on to the consumers, they added. Some analysts said that despite increase in the electricity tariff, furnace oil rates and diesel prices in the past six months, the rise in the cement prices was unjustified, as the main ingredient in cement industry is coal, which is becoming cheaper these days.
Cement manufacturers has warned that government that mounting losses have propelled closure of four out of 22 cement industry units, while others are on the verge of collapse. The APCMA sources say that they are still paying around Rs100 per 50 kg bag in terms of various taxes in addition to the freight charges. They say that the fiscal year 2010-11 proved to be a nightmare for the cement sector as 80 per cent of the cement manufacturers suffered huge losses on the back of stagnant local consumption. They regretted that the government failed to honour its commitment for payment of inland freight subsidy that could have boosted exports. APCMA sources have stated in their press release that continuous losses to cement industry are unbearable and might jeopardise the servicing of Rs132 billion in loans the industry owes to the banking sector. The association says that the cement industry has been incurring massive losses due to high cost of production, declining exports and decrease in local demand of the commodity but the government ignored all the issues of cement makers and no support was extended to the ailing industry.
The spokesman from APCMA said that two years ago the government agreed to share transportation cost from mills to sea port. This, he added, boosted exports and provided some relief to the industry but it is regrettable that the promised support was never provided. Even in the current budget, there is no mention of an inland freight subsidy of Rs270 million to the cement makers which has added to the problems of the industry, he stated. He recalled that the Economic Coordination Committee and Trade Development Authority of Pakistan had approved inland freight subsidy on export of cement by sea.
APCMA has called for the government to take action to save the cement industry which is the guarantor of progress in the country. The cycle of progress will move backward if prompt and positive steps are not taken at the right time. APCMA has demanded the government to encourage the construction of concrete roads and use of cement blocks instead of bricks which is the modern and internationally recognised method of construction.
It is significant to note that inflationary pressures in the past three years have surged rates of each item; however, the cement industry has not passed the increased cost on the consumers due to stiff competition amongst manufacturers and surplus capacity. Current cement rates range between Rs415 and Rs425 per bag in different markets. APCMA sources say that the cement manufacturers are yet to pass on the large impact of rapidly increasing input costs in coal, electricity, diesel, paper sacks and transportation cost. They claim that 30 per cent of the price per bag goes to the government in taxes and levies which means that a consumer pays Rs125 to the government while purchasing a cement bag.
The analysts say that they expect cement profitability that is expected to be more dependent on prices as compared to dispatches. If the dispatches clock in at (32.5mn tonnes in FY12 as expected) and prices remain firm, profitability of the big sectors is expected to generate further investor’s interest in these companies. However, cement dispatches are expected to improve from February onwards due to better utilisation as the election year dawns, thus the government is expected to enhance its public spending in the 2HFY12.
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