Cement Industry Pakistan Diamond Model Analysis

Cement Industry
History

1947 Only 4 factories Existed with a capacity of 0.5million tons
In 1972 the factories increased to 14 with a capacity of 2.5 million tons
In 1973 The industry was nationalized
State cement corporation of Pakistan was formed (SCCP)
1985 the industry was deregulated  and it was decided to privatize the firms
1991 Privatization started
2011 Current Capacity of 44 million tons

Significance

Contributes Rs 30 billion to taxes
The per capital world consumption is of  270kg
Pakistan per capital consumption is of 145 kg
The industry provide employment to 150000 people
There are 29 plants in the industry
21 are operational
The sector contribution to FDI is of $80.4 billion
Pakistan Exports 7.71 million tons of cement to
Afghanistan, India , Middle east , African countries ,Iraq
Pakistan is the 5th largest exporter of cement in the world
Cement is important for development of under develop countries
It is required for process of urbanization and rehabilitation

Factor Condition
 Raw Material
(75-80)%Lime Stone is required
15-20 % clay is Required
5% gypsum is required
Iron ore
Pakistan has has abundant resources of these raw material
limestone in Baluchistan is produced (90000metric tons  annual)
Gypsum production is of 36000   metric tons
iron production is about 260 thousand tons

Packaging

Without proper packaging cement can get spoiled
Cement Shelf life is 3-6 months
The cost per Bag is  $0.25
Labour
skilled labor is required in ratio 2:3
unskilled labor is required for transportation, vender, etc
skilled labor consist of engineers from local universities(Ned, NUST)
Cheap labour is an advantage
In-house training is carried out ,by foreign experts

Machinery 

Machinery is imported from China ,Europe and Italy
  The production process is standardized
Pakistan lacks the capacity to produce the mlocally
Quality control equipment is also imported

Source of Fuel
One ton of cement requires 3400-5000mj fuel energy
60-70% cost is of fuel
50% of this cost is required for clinker buring
20% is pre heater gas
Source of Energy
Oil
Gas
Coal
Electricity
Gas has many short comings even though its cheaper compared to Furnace oil(FO).The reason is that the required temperature cant be reached while using gas
In addition to this there is a shortage of gas in Pakistan as well
Companies mostly use FO and coal
Pakistan resources 
Pakistan has 180 billion M.tons of coal, though it has a higher sulfur content of 6%
Hence coal is imported  which has a sulfur content of 1%
the cost of coal is Rs 868 per ton
The cost of FO is Rs 2083 per ton
The domestic coal that is used comes form Quetta
Cheaper fuel sources are also considered E.g
Used Tyre are also used that have a potential to meet 40%of the requirement

Technology

in 1970s semi dry process was introduced 

in 1980 Dry process was discovered . 

Since than no significant break through have occured 

Research and Development 

waste heat recovery plant 

In house electricity generation

Labor training   

Production Process 

Dry Process required 85Kg of FO per ton

Wet process requires 165 kg of FO per ton

85% of production in pakistan is through Dry process  

Price/Cost:

Average cement prices are RS290 per 50 kg in 2010. (rise of Rs 40)

Though  the cost and exports may be affected due to weakness of the US dollar causing coal, electricity charges and freight prices, comprising 65 to 70 percent of the cost. 

The sharp decline in cement prices were due to domestic competition among producers has dampened the profitability of the industry.

To cope with this situation the manufacturers have strengthen cartel to set minimum cement prices. 

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.

General Sales Tax is Rs 660 per ton as compared to Rs 320 in India (2008-2009)

 GST became 17% in 2010

Cartels:

There is a cartel in the cement sector and that regulate the production of cement in the country. The cartel restricts the quota of each manufacturer to sell in the domestic market based on its market share, which in turn is derived from the available installed capacity. 

Types of cement:

1.       Ordinary Portland Cement

2.       Sulphate Resisting Cement

3.       White Cement

4.       Blast furnace slag cement

Production process:

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 up to the seventies were based on wet process whereas the plants established in the eighties and onward are based on dry process

Majority of Pakistani Industry employs the Dry Process rather than the semi wet or wet one.

Crushing à Grinding à Pyroprocessing àGrinding of Clinker and Packing

 Demand Conditions 

Pakistan Population increases at a rate of 2.1% per anum

Demand due to urbanisation 

Availability of credit to population and firms

state bank discount policy plays a significant role 

Political stability effects the demand

Economics Conditions of Pakistan and world 

Seasonal variations also effects teh demand for cement

Higher demand in summers

Public sector development projects and other project effect the demand for the cement

Housing sector demand consist of 40% of the total demand 

Current consumption of Pakistan is 22.5 million tons 

there has been a 77% decline in PSDP

Floods have also decreased the demand in Pakistan in 2010

Government has Imposed a quota of 70% of capital utilization

International Demand 
Chines market is huge 
China Produces 1.7 billion tons of cement per year
Though the chines demand has declined due to policy of the government 
Saudi Arab has lower price of cement due to avalibility of cheap fuel
Iran has 55 plants and produces double of what is required 
Afghanistan  market for pakistan is important

EXPORT DEMAND:

The exports stood at 7.656 million tons during July-April, 2010-11 against 8.799 million tons during the same period of 2009-10 which is a decline of around 15% from last year (DailyTimes 2011). The major countries affecting Pakistani exports are:

1. ·         Afghanistan
2. ·         China
3. ·         India
4. ·         African Countries
5. ·         Saudi Arabia
6. ·         Iran

Some of them are our emerging and existing competitors while others are our emerging and existing markets. We will analyze them in detail to find out the reasons behind the fall of exports in the current fiscal year. Also later on we will look at the government’s role in this situation.

Firm Structure and Rivalry 

Oligopoly with 16 firms listed on the stock exchange
80% plants located in North Pakistan
Lucky cement has a market share of 12.7%
Maple Leaf has a market share of 7.1%
DG cement has a market share of 9.8%
pioneer Cement has a share of 5.5%
APCMA is an apex body for cement manufactures 
its purpose is to project the industry to the government 
20-27 plants are operational 

There are Barieers to entry 
The industry is dominated by large players 
They achieve economies of scale 
Firms are located near raw material sources due to transportation fesibility
Prices are similiar 
There exist cartels in Pakistan
Competition commission has imposed a fine of Rs 6.35 billion due to formation of a cartel
There was a price war in 2009 which resulted in a decrease in price 
Related and Supporting Industry 
  Housing Sector total demand is 40% 
State bank has lent Rs 55 billion to private sector for housing
Investment in the industry of Rs 950 billion during 2005-2011
Government Projects dams (3.7 million tons demand if they are accepted )

Shipping Industry 

  Pakistani ports  has low efficiency
It takes 3days to load the same amount  that indian load in 6 hours 
Russian and US are unreachable due to high cost 

Packaging Industry -polypropylene

the pakistani industry is growing at a rate of 15% as compared to world average of 8%

Packaging has significant importance as it protects the cement

Currently there is a shortage of 12 million bags

Companies produce a bag at a cost of Rs 28-40 (per bag)

Mining and Quarrying Industry 

 Pakistan mining industry has much potential to develop  

Still mining is not mechanized in Pakistan

Low skill labour is required in pakistan

Huge deposit of limestone and gypsum

Transportation

 Russia is a possiblemarket

Local  transportation cost is higher than India (Rs 8/ton in pakistan as compared t oRs 3/ton)

Inland subsidy Freight been given is about 35%

Government

 North plants dont have access to the sea that resulted in a loss of Rs 10 billion

Pakistan have a heavy tax structure 

Rs 700/ton of tax been given 

2.5% special duty

GST of 17%

5% tax on utilities 

Rs 87 of tax been taken per bag