Analysis of Pakistani Industry

Analysis of Pakistani Industries
Term Report
“CEMENT INDUSTRY”
By
Sehrish Khan Rafat- 4666
Mahjabeen Hassan Khan -5633
Rabab Sajjad-5904
Ummia Azeem-4178
Zehra Hassan-4237
Amna Jameel
Submitted to
Dr. Irshad Khan
On April 16, 2008
1
CEMENT INDUSTRY
Term Report
2
3
TABLE OF CONTENT
TOPICS
PAGE NUMBER
Introduction to cement
industry-----------------------------9-10
Manufacturing
process---------------------------------------11-13
Overview of the
Industry-------------------------------------16-19
History---------------------------------------------------------
--21-22
Major
Companies---------------------------------------------23-
37
Demand and
Supply------------------------------------------39-55
Methodology
--------------------------------------------------58-60
SWOT Analysis of the

Industry----------------------------61-64
Conclusion----------------------------------------------------
----65
Recommendations------------------------------------------
-66-68
4
Bibliography--------------------------------------------------
----69
5
LETTER OF ACKNOWLEDGEMENT
First of all we are very thankful to Almighty Allah who helped us out in
completing this report on time. Working on this report has given us the
opportunity to deal with the topic in detail.
We would like to thank, our course instructor Dr. Irshad Khan,

who gave me the opportunity to do this job. We really appreciate his
efforts for teaching us Analysis of Pakistani Industries, for making
every class interesting and for his valuable support and guidance.
This surely has been a memorable and learning experience. We

have made my best efforts to cover all aspects required to compile this
report and hope that all the information is relevant and
comprehensive.
Sincerely,
Sehrish Khan Rafat (4666)
Rabab Sajjad-5904
Ummia Azeem-4178
Zehra Hassan-4237
Amna Jameel
6
LETTER OF TRANSMITTAL
April 16, 2008
Dr.Irshad Khan,
Faculty of CBM,
Korangi Creek,
Karachi.
Dear Sir,
As assigned by you, we have investigated on the Cement
Industry through the context of Analysis of Pakistani Industries, and
compiled the required information in form of a report.
Most of information for this report came from the articles, the
internet and from whatever has been taught in class. Thank you for
assigning this job. We really enjoyed the opportunity to learn more
about the course. If you have any questions about the report, please
contact us.
Sincerely,
Sehrish Khan Rafat
Rabab Sajjad-5904
Ummia Azeem-4178
Zehra Hassan-4237
Amna Jameel
7
EXECUTIVE SUMMARY
In Pakistan, there are more than 25 small and large cement
manufacturers operating within the country producing ordinary grey
Portland, white, slag and sulphate resistant varieties of cements. This
industry has an oligopolistic structure because the product is
homogenous.
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. After
analyzing the industry it is found that no manufacturers commanding a
market share over 10%. Some manufacturer are enjoying the brand
equity and charging higher prices over other manufacturers.
Pakistan currently has a per capita consumption of 120kg of cement,
which is comparable to that for India at 135kg per capita but
substantially below the World Average 270kg and the regional average
of over 400kg for peers in Asia and over 600kg in the Middle East.
Over the years a number of tax policy and administrative measures
have been introduced to attract investment and facilitate growth of the
cement industry. The Government has reduced central excise duty
(CED) on cement in the budget for 2007-08 in order to boost
construction activity.
In Pakistan APCMA plays a significant role in projecting the cement
industry to the Government and coordinating various activities in
respect of formulation of Government policies for the cement industry.
Cement demand is significantly affected by the Public Sector
Development Program (PSDP), construction of dams, elevated and
concrete roadways, residential construction as well as exports.
As far as exports are concerned majority of or export heading for

Afghanistan (about 95%) and the remainder towards Iraq and UAE.
Deregulation after accession of Pakistan to WTO is expected to open
the window of competition from cheaper markets. There may be no
tariff after this deregulation on import of cement allowing its entry into
Pakistan from cheaper market at lower rate. Cement from cheaper
markets may also block Pakistan’s export of cement to its neighboring
countries.
To sum up, cement industry is among the most advanced industries in

Pakistan and has integrated production facilities based on locally
available raw materials. It has done continuous technological up-
8
gradation, having acquired modern dry process technology. It has
installed latest equipment for dust collection and is relatively
environmental-friendly. It has recently converted furnace-oil firing to
coal firing system, resulting in substantially reduced production cost.
9
INTRODUCTION TO CEMENT INDUSTRY
10
INTRODUCTION – CEMENT INDUSTRY
Cement industry is a major indicator of economic growth and revival of
any country. This industry gives the growth and improvement of
infrastructure of a country. In Pakistan, positive macro economic
indicators and governments intention of spending more on social and
infrastructure development has increased the demand for cement
many folds. The cement industry people say that the current domestic
demand leaves a surplus of 15 million tons of cement, and the country
has an estimated export potential of 1.2 million tons of bulk cement
per annum, as well as 600,000 tons of bagged cement and 1.2 million
tons of clinker per annum. New plants are coming up in various
countries and will start production in the next two to three years.
Pakistan can make efforts to export three million tons per annum
during the next two to three years. The cement industry, however,
ruled out any dent in the domestic prices in case cement exports are
enhanced in the future, executive director Lucky Cement, Abdul
Razzak Thaplawala said. He added that the industry people had
discussed the issue of export of cement at length with the industries
secretary in the second week of January. He said that Pakistan’s
cement industry is again in a state of recession as the annual
production capacity has increased to over 35 million tons and will
further go up to 39 million tons as compared to the installed capacity
of 17 million tons in 2005. The local demand is increasing, but has not
kept pace with production and is likely to increase to a maximum of 22
to 23 million tons per annum, he added. The present FOB rates for
export of cement and clinker to compete with India, Indonesia and
China are $47-48 per ton FOB Karachi for bulk cement, $36-37 per ton
for clinker and $48-53 per ton for bagged cement. “These rates are
very low and it will be possible only to compete with these countries, if
the government gives incentives,” he said, adding “without incentives
the industry is quoting $53 per ton which is very high and does not
compel industry people to enter export market with significant
quantities. The industry exports clinker at $37.5 per ton. Razzak said
by exporting only 20 per cent of the surplus capacity, Pakistan may
well be in a position to earn $125-150 million per annum by exporting
three million tons at an average rate of $45 per ton. However, the
government needs to address some of the problems of the industry so
that the producers could fetch good results on the export front.
He said port costs in Pakistan are very high as compared to India,

China and Indonesia.
Wharf age cost charged by the KPT is Rs40 per ton for cement and
clinker export which is over 1.75 per cent of the export value while
most of the cargoes attract wharf age of less than 0.25 per cent of the
export value.
11
KPT wharf age charges need to be rationalized to the level of Port
Qasim of Rs22 per ton.
The port costs ie port dues average about $0.90 per ton at KPT or Port
Qasim versus 0.50 per ton in India, Indonesia and China. He said there
is no clinker or cement export terminal while in other countries it is
available. At present a token rebate of Rs25.08 per ton is allowed on
cement export and there is no rebate on clinker export.
12
Demands Growth VS GDP Growth:
GDP growth is used as yardstick for measuring demand growth of
cement. In its simplest form, the theory suggests, a strong positive
correlation between GDP growth rate and Cement demand growth.
High GDP growth leads to high cement consumption. The reverse is
true when GDP growth declines. It is believed that cement
consumption increases along with the rise in per capita income.
Cement consumption is also reflective of the economic development
achieved by a country.
Developments in the sector:

Expansion of existing capacities is in the shape of plant up gradation
or setting up new production lines, is talk of the town these days. With
its roots fixed on the ground of prospective demand growth in the
years to come, expansion is what almost all cement manufacturers are
pursuing. Annual production capacity has reached 25 million tons by
June 2006 against capacity of 18.6m tons per annum in June 2005. If
all the expansion plans are materializes, capacity is likely to touch 28m
tons by the June 2007 & subsequently it would reach 35.7m tons in
2008. Most of the new projects or expansions are concentrated in
northern region, which already captures around 77% capacity in total
industry. Against 14.3m tons per annum current capacity out of total
capacity, northern region’s capacity may jump sharply to 20.7m tons
per annum by 2006. While, capacity of south region is expected to
reach 7.0 tons per annum against current capacity which is 4.25m tons
per annum.
The bothersome fact lies on the other side of coin, that is, demand. A
Big question that kills all the joy of expansion is “Will there be enough
demand in the country to absorb the excess supply?” or putting it in
13
other words “Will the recent spurt in cement demand will be sustained
over the period of time?”
Current stance of the cement sector:

After completion of major expansion plans in Pakistan in 2007, there
would be a surplus to export in regional markets particularly to China,
India and Afghanistan, however in the same period Iran would also be
able to approach vigorously these markets as its most of the cement
plant will start to come online.
Iran would get benefit in terms of price as cement prices in Iran is

among the cheapest in the world as the price of cement in Iran
remained in range of $20-$25 per ton. On the other hand it is expected
that being the US ally, Pakistan would get most of the favor in order to
keep its market share in these markets given the fact that all the
construction activities in Iraq and Afghanistan would be taken by US.
THE MANUFACTURING PROCESS OF CEMENT
THE PROCESS
1. Processes used for manufacture cement:
Wet Process
The wet process has many limitations like:
Kiln dimension
Large water requirement
Extremely poor heat efficiency
In view of these limitations the wet process has become outdated.
Semi-Wet Process
The semi-wet process is another way of manufacturing cement used in
Pakistan. This process is more suitable for materials with sufficiently
high plasticity. Due to high fuel or energy consumption this process
has also become obsolete.
Dry Process
Previously, the dry process was only used in situations where water
and the raw materials were insufficient. But now it is the most popular
process in the cement industry due to its numerous advantages.
The advantages are:
14
 The fuel requirement is about 800 Kcal per kg of clinker (which is
about 40 percent less as compared to the wet process).
 This process enables the processing of a water range of raw and

the maintenance is easier.
 The raw material is preheated and partially calcium resulting in

higher kiln efficiency.
 The kiln being shorter in length requires less space in erection

and easier to maintain.
15
2. The Process
3. Mining and Milling
The essential raw materials used for the manufacturing of cement are:
Limestone, Shale and Sand. To acquire limestone several layers of
rock are required to be detached. To sum it all, the quarry moves
about seven million tones of rock each year - two million tones of
limestone, and the remaining five million tones of other material.
This dig out is very different to the normal type of cement-linked

quarry. It usually extracts the rock from the side of a hill which poses a
number of challenges in terms of getting to the limestone, transporting
the other rock and then replacing the materials afterwards.
To get to the limestone, various other types of rock have to be
extracted and moved. Once the removal is done, the overburden is
transferred behind the cut and stored. Once the limestone from the cut
has been used up, the overburden is replaced to restore the stability of
the land.
To extract limestone the rocks are detached by blasting. If any large
rocks are left after the blast they are broken up by the drop ball. This
simply involves dropping a large ball onto the rocks. The limestone is
then transferred by either a 55 or an 80 tone truck to the crusher.
After this, the limestone and shale are transported to the raw mill from
the quarry by conveyor. At this stage the materials are in the form of
small rocks, up to 150 mm in size.
16
The raw mill then condenses these materials in the form of a fine
powder. Then, sand is added to the limestone and shale, in the correct
proportions, to create the raw meal. The material is crushed by a pair
of rollers which presses down onto a rotating table. The material is
then caught up in a high velocity gas stream, which sweeps it
upwards. The fine powder then exits the mill, while any oversized
material falls back to the table for further grinding. The raw meal is
then extracted from the gas flow by a large electrostatic precipitator,
and is then stored in silos before it enters the pre-heater stage.
4. Pre-heater and Pre-claimer:
The raw meal from the storage silos is fed into the pre-heater. Initially
the raw meal is crushed by two large grinding wheels in the Raw Mill,
and is then blown up the pre-heater where it is heated by hot exhaust
gases from the kiln. The pre-heater is a large tower some 90 meters
high, containing five vessels, or cyclones, through which the raw meal
is passed. The raw meal enters the pre-heater at the top and descends
through the cyclones, being heated by hot exhaust gasses from the
kiln. Additional fuel is added at the base of the pre-heater. At this
stage, the raw meal is heated to 900oC, and the chemical reaction is
initiated. This is known as the precalciner stage. About 60% of the total
amount of fuel used in the process is burnt at this stage. The fuel is
principally ground coal, but Blue Circle is experimenting with burning
various recycled materials. The material then passes from the
precalciner to the kiln.
5. The Kiln:
After the pre-heater stage, the material is moved into the kiln. The raw
meal enters the 60m long, 4m wide kiln tube, which is slightly inclined
downwards. It rotates at 3.5 rpm, which assists in moving the raw meal
through the kiln, towards the 20m long flame. Once inside the rotary
kiln, the material is moved towards the coal flame, which heats
itto1450oC, completing the chemical reaction. At this stage the
material is known as clinker. The hot clinker is then rapidly cooled by
blowing air over it. A small quantity of gypsum is added to prevent the
cement setting too quickly, finally prior to it being ground in ball mills
to form a fine powder: cement. It is then transported to the next stage
of the process; ready for the final milling operation. The cement is then
stored prior to dispatch. The majority of the cement is dispatched in
bulk by rail or road. The remaining cement enters the packing process,
where it is placed into bags, which are packed onto pallets prior to
road dispatch.
6. Packaging and Distribution
17
Once the cement has been manufactured, it is stored prior to dispatch
in bulk or in bags.
Bulk distribution is either by road or by rail. In both cases, the bulk
tankers are placed under the storage silo, and are filled to
predetermined levels by computer control. Bag distribution is
performed by road. The cement is transported from the silo into the
bagging machine, which automatically picks up, opens and fills the bag
with the correct quantity of cement. The bags are then sealed, marked
with the production date, and transported to the palletizing machine.
Prior to being packed onto a pallet, each bag is sprayed with an
adhesive, which increases the stability of the pallet. The pallets are
packed automatically on the palletizing machine, which rotates the
pallet in order to improve the stability of the bags. The pallets are then
stored, prior to road distribution.
TESTING TIMES FOR CEMENT INDUSTRY
During the early nineties there was an acute shortage of cement in the
country, particularly in the north. Demand could not keep pace with
supply and Pakistan was forced to continue importing cement.
Importing cement is an expensive affair. Since it is a heavy
commodity, freight and transport charges are often exorbitant. Due to
the shortage coupled with high cost of imports, cement prices in the
early 90s were high.
But demand for cement was growing rapidly (at an average of 8% a

year). The economy also looked as if it was heading towards a high
growth phase. There was some foreign investment coming in,
significant infrastructure development projects were predicted, many
Independent Power Producers were cropping up and the population
continued to grow unabated. The GDP growth rate was estimated at
6.5% and population growth at 3.2%. Therefore, it looked as though
there would be an ever-increasing demand for cement. Because it was
felt that the economy would grow significantly and there would be a
high demand for cement, many of the existing plants — Cherat, D.G
Khan, Maple Leaf, Pakland, Dadabhoy, AC Wah and Kohat —
significantly expanded their capacities. Five new plants were also set
up in the private sector during the mid-nineties to meet expected
future demand: Pioneer (1994), Lucky (1996), Askari (1997), Fauji
(1997) and Bestway (1998). Because demand was higher in the north,
these five new cement plants were all set up in what the All Pakistan
Cement Manufacturers Association (APCMA) calls the ‘North Zone’.
Pakistan’s cement sector was; therefore, ready to supply the demand
that was predicted.
At the time of independence in 1947, only one or two units were
producing grey cement in the country. During the decade of 1948-58,
the number of cement units increased to six. During the Ayub era the
economy started to grow and the construction activities underwent a
18
boom. To meet the growing demand of cement new units were set up.
During the decade of 1958-68, the number of cement units increased
from 6 to 9. During the following period of Zulfiqar Ali Bhutto all the
industrial units, including cement industry, were nationalised,
therefore, no new unit was set up during 1971-77. During the period of
General Zia-ul-Haq, 1977-88, denationalization of industrial units
boosted the investments. Housing and construction industries picked
up and the demand for cement increased. Thus, the number of cement
units increased from 9 to 23 and finally 24.
Percentage growth of cement industry

Year Percentage
1990-91 3.66
1999-00 - 3.33
2000-01 1.40
2001-02 1.61
2002-03 12.11
2003-04 15.0
Presently, a number of factors are attributed to this tremendous

growth represented by various indicators. Cement exports, mainly to
Afghanistan doubled during the three-quarter period of the current
year, attaining a level of 0.78 million tons, but that accounts for only 8
percent of the total production. Cement is one of the basic ingredients
for development of a country. Its per capita consumption is an
indicator of economic activity in the country. Unfortunately, Pakistan is
trailing behind all other developing countries in the region with lowest
per capita consumption of cement. The per capita consumption of
cement in Pakistan was as low as 43 kg per head per annum in year
1977-78, as compared to world average of 245 kg. Pakistan currently
has a per capita consumption of 120kg of cement, which is comparable
to that for India at 135kg per capita but substantially below the World
Average 270 kg, and the regional average of over 400kg for peers in
Asia and over 600kg in the Middle East.
19
Country Per Capita
Consumption
(Kg)
Taiwan 1004 kg
Malaysia 870 kg
Thailand 600 kg
Turkey 512 kg
China 410 kg
Syria 369 kg
Iran 274 kg
Mexico 251 kg
Philippines 220 kg
Vietnam 126 kg
Turkmenistan 159 kg
Indonesia 139 kg
Sri Lanka 106 kg
India 89 kg
Pakistan 72 kg
Per Capita Consumption (Kg)
Taiwan
Malaysia
Thailand
Turkey
China
Syria
Iran
Mexico
Philippines
Vietnam
Turkmenistan
Indonesia
Sri Lanka
India
Pakistan
20
OVERVIEW-THE CEMENT INDUSTRY
21
OVERVIEW
Pakistan is fortunately rich in the deposits of limestone, clay
and gypsum, which constitute basic raw materials for
manufacturing of cement. In spite of having abundant raw materials
and rising growth in demand of cement, only five cement factories
were established during the initial thirty years of independence, with
aggregate capacity of 3.2 million tones. Consequently, Pakistan had to
import cement for a long period, which reached to a level of 1.3 million
tones in the year 1981-82. Import of cement continued from 1971 to
1985. Its scarcity also hampered the development process in the
country. There are more than 25 small and large cement
manufacturers operating within the country producing ordinary grey
Portland, white, slag and sulphate resistant varieties of cements. There
are 29 cement production units in the country. Up to May 2007, the
total installed cement production capacity is 36.841 million tones. By
the end of June 2011, the installed cement production capacity will
touch to the level of 49.579 million tons.
An analysis of the competitive environment reveals the

fragmented nature of the industry with no manufacturer
commanding a market share over 10% (DG Khan). Nonetheless, some
manufacturers, on the back of powerful brand equity are able to
command a relatively higher price, for e.g., Cherat Cement due to its
niche over exports and Attock Cement over the ‘Falcon’ brand in the
southern domestic region. The competitive environment, however, is
bound to change as companies prepare to boost capacity on
anticipation of greater future demand.
The cement cartel is associated with the interests of all the cement
manufacturing companies in the country and regulates the production
available for the domestic market. 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.
With the current expansion levels prevailing in the industry, the
market share for each company is bound to get revised. Big players
like DG Khan, Lucky and Bestway would be at an advantage as their
higher capacities would result in increased market share (stable at
minimum), hence a greater quota to sell in the local market. However,
companies, which do not wish to expand, will be forced to do so to at
least maintain market shares at current levels.
Cement exports constitute an integral part of the supply and

demand dynamics, with the majority of exports heading for
Afghanistan (about 95%) and the remainder towards Iraq and
UAE.
22
Major expansions under the next expansion phase in the cement
sector started coming online late FY06 onwards, due to which installed
capacity increased to 30mpta by Jan’07. As a result more than
proportionate capacity expansions, the cement sector experienced
acceleration in price competition despite the 32% demand growth in
FY07 to date.
Pakistan currently has a per capita consumption of 120kg of cement,
which is comparable to that for India at 135kg per capita but
substantially below the World Average 270kg and the regional average
of over 400kg for peers in Asia and over 600kg in the Middle East.
Presently, the cement industry of Pakistan is heavily burdened due to
levy of Federal Excise Duty @ Rs. 750 per ton and General Sales Tax @
15% on duty paid value. In addition to Federal Excise Duty and General
Sales Tax, cement industry is also paying the provincial
23
Levies (Royalty and Excise Duty) on acquiring of raw material for
production of cement i.e. lime stone and shall clay. Per ton cost impact
of these taxes in four provinces of Pakistan is as follows:
Raw material Punjab NWFP Sindh Baluchist

an
Lime Stone 24 21 17 65
Shall/Clay 3 4 3 11
A comparison of taxation and retail prices with other regional countries

revealed that taxation in Pakistan is highest while cement retail prices
are lowest. Housing sector has been looked upon as stimulator of
economic growth since there is a large estimated gap of 5.38 million
housing units against annual addition of 300,000 units in the country,
many tax exemption and incentives are provided to encourage new
construction.
In short, cement industry is among the most advanced industries in

available raw materials. It has done continuous technological up-
gradation, having acquired modern dry process technology. It has
installed latest equipment for dust collection and is relatively
environmental-friendly. It has recently converted furnace-oil firing to
coal firing system, resulting in substantially reduced production cost.
Cement binding material used in construction and engineering, often
called hydraulic cement, typically made by heating a mixture of
limestone and clay until it almost fuses and then grinding it to a fine
powder. When mixed with water, the silicates and aluminates in the
cement undergo a chemical reaction; the resulting hardened mass is
then impervious to water. It may also be mixed with water and
aggregates (crushed stone, sand, and gravel) to form concrete .
Cement made by grinding together lime and a volcanic product found
at Pozzuoli on the Bay of Naples (hence called pozzuolana) was used in
ancient Roman construction works, notably the Pantheon. During the
Middle Ages the secret of cement was lost. In the 18th century, John
Smeaton, an English engineer, rediscovered the correct proportions
when he made up a batch of cement using clayey limestone while
rebuilding the Eddystone lighthouse off the coast of Cornwall, England.
In the United States, production of cement at first relied on processing
cement rock from various deposits, such as those found in Rosendale,
N.Y. In 1824, Joseph Aspdin, an English bricklayer, patented a process
for making what he called Portland cement, with properties superior to
its predecessors; this is the cement used in most modern construction.
Modern Portland cement is made by mixing substances containing
lime, silica, alumina, and iron oxide and then heating the mixture until
24
it almost fuses. During the heating process dicalcium and tricalcium
silicate, tricalcium aluminate, and a solid solution containing iron are
formed. Gypsum is later added to these products during a grinding
process. Natural cement, although slower-setting and weaker than
Portland cement, is still employed to some extent and is occasionally
blended with Portland cement. Cement with high aluminates content is
used for fireproofing, because it is quick-setting and resistant to high
temperatures; cement with high sulfate content is used in complex
castings, because it expands upon hardening, filling small spaces.
25
26
HISTORY
27
HISTORY
In 1921 the first plant was established in Pakistan at Wah. In 1947,
there were only five cement plants in Pakistan with an installed
capacity of half a million and aggregate demand of 1mpt. 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. In 1947, there were only five cement
plants (four in West Pakistan and another in the then East Pakistan).
The cumulative capacity of all these units was about half a million tons
per annum as compared to its demand of over a million tons at that
time.
At present there are twenty-seven cement manufacturing units (out of

which 17 are listed in Karachi Stock exchange) with a total installed
capacity of 15.8 million tons per annum. In 1998-99, Pakistan
produced 9.32 million tons of cement i.e. at 60 % of installed capacity
due to low demand. Until 1970, the cement plants were installed on
wet process or semi-dry technology while the plants installed after
1980s are based on dry process. The dry process is atleast 50% more
energy efficient than the wet process. Presently, 85% of the installed
capacity is based on the dry process.
At the time of independence in 1947, only one or two units were

producing grey cement in the country. During the decade of 1948-58,
the number of cement units increased to six. During the Ayub era the
economy started to grow and the construction activities underwent a
boom. To meet the growing demand of cement new units were set up.
During the decade of 1958-68, the number of cement units increased
from 6 to 9. During the following period of Zulfiqar Ali Bhutto all the
industrial units, including cement industry, were nationalised,
therefore, no new unit was set up during 1971-77. During the period of
General Zia-ul-Haq, 1977-88, denationalisation of industrial units
boosted the investments. Housing and construction industries picked
up and the demand for cement increased. Thus, the number of cement
units increased from 9 to 23 and finally 24.
Following this period, the government became complacent and the

demand grew to the extent of outstripping supply. The government
reacted quickly by setting up the Gharibwal and Javedan Cement in
1964, followed by Mustehkam Cement in 1966. Following the Economic
Reforms Order of 1972, the cement industry was nationalized and
brought under the strict regulation and price setting regime of the
State Cement Corporation of Pakistan (SCCP).
28
As a result of nationalization, a total of 10 cement units with an
installed capacity of 2.8 million tons per annum were transferred to the
SCCP. For the next 15 years, no new cement factory was established.
As a result, the country had to face an acute shortage of cement in the
1970's and early 1980's. The gap had to be filled by importing cement
at a cost of scarce foreign exchange. Over the entire period of state
control, SCCP established five new units with an installed capacity of
1.8 million tons per annum. Between 1977-88, government policy
shifted towards denationalization and emphasis on housing and
construction. To meet the demand, in the 80s, seven units with a total
capacity of 2.54m tons were allowed by the government to be set up
in the private sector and four plants were
29
Set up by the SCCP in the public sector. The private sector plants were
Cherat (1985), Pakland (1985), Attock (1986), Dadabhoy (1988), Essa
(1988), Anwarzeb White Cement (1988) and FECTO (1989). The public
sector plants were Thatta (1983), Dandot (1983), Kohat (1983) and
D.G. Khan (1985). By the end of this period, there were a total of 24
cement plants in the country. But it was not an easy time for private
sector plants. Their prices had to compete with prices fixed by the
SCCP, which were on the lower side. In 1992, the State Cement Era
came to an end with the privatizations of eight cement plants: Maple
Leaf, Pak Cement, White Cement, DG Khan, Dandot, Gharibwal, Zeal
Pak and Kohat. Other privatisations would follow between 1986-
2000.In 1985-86 the cement industry was deregulated giving the
private sector the opportunity to establish new plants, although bulk of
the capacity was still controlled by the SCCP through the fixation of
prices. Taking advantage of a severe shortage of cement and price
deregulation, the private sector had set up 7 more plants by the time
privatization commenced in 1991.
During the regime of Nawaz Sharif the industry went through a major
transformation. The government embarked upon an ambitious
privatization programme and 8 units were privatised. Today, out of the
24 existing cement units, only two remain in the public sector –
Mustekhum in the north and Javedan in the south. Twenty-two are in
the private sector and 21 are listed on the Karachi Stock Exchange.
Thus by the end of 1990, the total capacity of the cement industry was
enhance to 8.5mtpa. in the first half of 90’s, Pakistan had to import
cement which led to increase in cement prices resulting in high
profitability for cement companies. This tempted some of the existing
units like Cherat, Pakland, Dadabhoy, Ac Wah, D.G. Khan, Maple Leaf
and Kohat to go for expansion in their plants. Simultaneously, 5 more
new projects with aggregated capacity of 5mpta tons came on the
stream. As such, production capacity went up to 16mpta by the end of
2000.
30
MAJOR PLAYERS
31
MAJOR PLAYERS IN THE INDUSTRY
Major players are:
 Lucky Cement
 D.G Khan
 Maple Leaf
 Kohat cement
LUCKY CEMENT
PROFILE:
Lucky is a part of Yunus Brothers Group, which is a renowned group
with diverse interest in textiles, manufacturing and power. Lucky
Cement Limited is presently a 21,000 Tons Per Day, dry process
Cement Plant, located on main Indus Highway between D.I.Khan &
Bannu in Pezu, Distt. Lakki Marwat, NWFP. Lucky Cement came into
existence in 1996 with a daily production capacity of 4200 Tons par
day, currently is an omnipotent cement plant of Pakistan, and rated
amongst the few best Plants in Asia With production facilities in Pezu
(Production capacity: 13,000 Tons per day) as well as in Karachi
(Production capacity: 8000 Tons per day) it has the tendency to
become the hub of cement production in Asia.
Lucky became the new market leader after four fold increase in
capacity from 1.5mtpa in FY 05 to 6.6mtpa by FY07. Be sides gaining
the advantage of being the early bird in the current expansion spree in
the cement sector, another unique attribute of LUCK’s expansion
project is that it became the only company to have a plant both in the
Northern and southern region. The company due to Chinese origin of
its plant also enjoys the lowest expansion cost per ton, which should
accelerate its project payback. After its success with its green field
project in the south, the company plans to further expand capacity in
south in order to benefit from the export potential as well as
infrastructure development currently underway at Karachi and
Gawadar. The company is a pure play for investors wishing to take
exposure to the rapid economic growth and infrastructure
development in the country. Currently the stock trading at FY07 EV/
EBITDA of 6.2x, EV/ton of US $74 and offers a 36% upside to fair value
of PkR89.
THE EXPANSION:
Being the first mover in the current expansion spree and relatively
higher increase in capacity, Lucky cement became the new market
leader in the cement sector despite delays, which has been the case
for most of the players. With the commissioning of the second plant in
32
Karachi, Luck became the only company to have a plant both in the
north and south, due to aggressive expansion plan, the company has
also been tapping new avenues for exports with the commencement of
the export dispatches in bulk. The company has also acquired
equipment for bulk transport/ loading and has received approval for
setting up storage facilities at the sea port. Moreover Luck has also
shown interest in bidding for a cement export terminal to be offered by
the GOP in CY07 on BOT basis.
33
Even though Luck is trading relatively higher on P/B and EV/ ton vs. the
sector, the company and the lowest expansion cost per ton. Due to
multiple lines (4 lines) and the staggered commissioning schedule in
its expansion plan, Luck was able to avoid significant delays in the
overall schedule of the project. Now with plants in the north and south
each, the company should enjoy freight synergies both in the domestic
market as well as the export market. Moreover, commencement of the
export dispatches in bulk should help to reduce cost and increase
capacity utilization.
The company has plans to undertake a further expansion of 5000tpd

at its Karachi plant, which will increase its capacity to 26,600tpd. The
existing capacity from 2 lines of 4200tpd each at the Karachi plant is
catering to demand from Karachi and being utilized for exports to
Middle East market. However in the wake of government plans to
develop Gawadar port as well as growth in export potential both from
Middle East and Africa, there is every possibility that the southern
region might face capacity shortage in the next 2 years. Nevertheless
with the government spare capacity in the sector, the management
does not have any urgency on undertaking the proposed expansion.
Moreover, the proposed project should help toward off threat of new
entrants (players from the north as well as the new entrants) in to the
southern region.
SWOT ANALYSIS
STRENGTHS:
34
 First mover advantage has allowed the company to increase
market share as well as pricing power.
 Unique North and South combination, providing the company
with, market penetration and freight synergies.
 Lowest per ton expansion cost in the cement sector.
35
WEAKNESSES:
 Aggressive capacity expansion has decreased the company’s

utilization.
 Defending market share when expansion projects of remaining
players come online.
 Higher maintenance cost in the long run due to Chinese origin of
cement plant.
OPPORTUNITIES:
 Construction of mega dam projects as well as ongoing

infrastructure development spending by GOP.
 Expansion or acquisition in the Southern region due to increasing
potential (Karachi, Gawadar).
 Can export to the Middle-East on large scale through Karachi sea
port, post construction of cement export terminal, expected to
be offered on BOT by GOP (Luck is one of the interested parties
for the project).
THREATS:
 Being a pure commodity business, the company is prone to

cynical nature of demand of cement.
 Delay in construction of major dam projects due to shortage of
funds as well as political obstacles will dent cement demand in
the short run.
 Ongoing tussle between the cement manufacturers and
monopoly control authority (which is being given increased
regulatory power).
36
MARKET SHARE
37
Market Share Sep-07 Sep-06
(%) (%)
Domestic Sales 14.03% 15.51%

Cement
Export Sales 37.30% 38.25%

Cement
Clinker 24.81% 0.00%
Sub Total 36.28% 38.25%
Total 18.84% 18.29%
38
39
D.G. KHAN CEMENT
PROFILE:
D.G. Khan Cement Company Limited (DGKCC), a unit of Nishat group,
is the largest cement-manufacturing unit in Pakistan with a production
capacity of 5,500 tons clinker per day. It has a countrywide distribution
network and its products are preferred on projects of national repute
both locally and internationally due to the unparallel and consistent
quality. It is list on all the Stock Exchanges of Pakistan. DGKCC was
established under the management control of State Cement
Corporation of Pakistan Limited (SCCP) in 1978. DGKCC started its
commercial production in April 1986 with 2000 tons per day (TPD)
clinker based on dry process technology. Plant & Machinery was
supplied by UBE Industries of Japan.
Nishat Group acquired DGKCC in 1992 under the privatization initiative

of the government. Starting from the privatization, the focus of the
management has been on increasing capacity as well as utilization
level of the plant. The company undertook the optimization by raising
the capacity immediately after the privatization by 200tpd to 2200tpd
in 1993.
CAPACITY ADDITION:
To meet the increasing demand and to capitalize on its geographic
location, the management further expanded the capacity by adding
another production line with a capacity of 3,300 tons per day in year
1998. Design of the new plant is based on latest dry process
technology, energy efficient and environmental protection from
particulate pollution according to the international standards. The
plant and machinery was supplied by M/s F.L. Smidth of Denmark. As a
result, DGKCC emerged as the largest cement production plant in
Pakistan with annual production capacity of 1,650,000 M tons of
clinker (1,732,000 M.Tons Cement) constituting about 10% share of
the total cement production capacity of the country. The optimization
plan is still underway to increase the total capacity of the two units to
6700 TPD by mid of 2005 from 5500 TPD at present.
EXPANSION:
Furthermore, the Group is also setting up a new cement production
line of 6,700 TPD clinker near Kalar Kahar, Distt and Chakwal, the
single largest production line in the country. First of its kind in cement
industry of Pakistan, the new plant will have two strings of pre-heater
towers, the advantage of twin strings lies in the operational flexibility
40
whereby production may be adjusted according to market conditions.
The project will be equipped with two vertical cement grinding mills.
The cement grinding mills are first vertical Mills in Pakistan. The new
plant would not only increase the capacity but would also provide
proximity to the untapped market of Northern Punjab and NWFP
besides making it more convenient to export to Afghanistan from
northern borders.
41
DEMAND
Demand for cement is strong, but it is even stronger for quality
cement. Although the industry is currently operating at a capacity
utilization of 75%, DGKC's capacity utilization is still at 112%.
Producing higher quality cement at premium prices along with its FL
Smidth plant, this is the most efficient in terms of fuel efficiency; DGKC
boasts one of the highest gross margins in the industry. Although it
has lost its market leader position to Lucky Cement, after the
commissioning of its capacity expansion of 7000tpd in March ‘07,
DGKC should be able to continue selling its cement like hot cakes.
SWOT ANALYSIS
STRENGTHS:
 High quality cements commanding premium prices.

 Fuel efficiency translating into better gross margins.
WEAKNESSES:
 Confined to the Northern region only.

 Highest expansion cost per ton in the sector.
 Loss of market leader position to weaken pricing power.
42
OPPORTUNITIES:

 Can benefit from further economies of scale post-expansion.
 Expansion or acquisition in the Southern region due to increasing
potential (Karachi, Gwadar).
 Can export to the Middle-East on large scale through Karachi sea
port, post construction of cement export terminal, expected to
be offered on BOT by GoP (DGKC is one of the interested parties
for the project).
THREATS:
 Majority of the cement capacity expansions have been

the short run.
Monopoly Control Authority (which is being given increased
regulatory powers).
ANOTHER EXPANSION:
43
The company has also announced a further expansion of 10-12ktpd
and has shown interest in acquiring another cement plant in the South,
in order to tap the potential in the Southern region as well as the
Middle East market for exports.
However, this announced expansion is more of a pre-emptive action
taken by the company and with the overall capacity additions in the
cement sector; we do not think market
dynamics would make it feasible. Nevertheless, the company's interest

in acquiring a cement plant in the South seems more beneficial in
terms of market presence and freight synergies; we feel the company
will take the latter route.
ANALYTICAL APPROACH TO FURTHER EXPANSION:

The company has also announced a 10-12k tpd expansion under which
it has placed an order for a 5000tpd grinding mill. The grinding mill is
expected to be installed in FY09. However, this announced expansion
is more of a pre-emptive action taken by the company. The company
has a shortage of grinding capacity and sells its excess clinker
production to other cement manufacturers. Therefore, with the
addition of the mentioned grinding mill, DGKC will not only be able to
convert its excess clinker production to cement for sale but should also
have spare grinding capacity. Furthermore, if market dynamics make it
feasible, then it would add an additional 5000tpd line to complete the
10k tpd expansion. However, with the overall capacity additions in the
cement sector, we do not think it would be feasible to do so. Rather
than undertaking further capacity expansions in the current scenario,
we think it would be beneficial for the bigger cement manufacturers to
acquire existing cement plants which can be strategic fits for them in
terms of location.
44
MAPLE LEAF
PROFILE:
Maple Leaf Cement is a part of MLCF is the part of Kohinoor Maple Leaf
Group. The group comprises of companies, which are ranked amongst
the top companies in cement and textile sector. Maple Leaf Cement
Factory is one of the pioneers of cement industry in Pakistan. Maple
Leaf owns and operates four production lines for grey and two
production lines for white cement. The plants are located at Dandkhel
District Mianwali. Total annual clinker capacity of Grey Cement is 1.4
million tons while capacity of white cement is 30,000 tons. Maple Leaf
has developed a niche market for specialized cement such as SRC
(Sulphate Resistant Cement), Low Alkali Cement and Oil Well Cement.
Maple Leaf is the only local Cement manufacturer producing Oil Well
Cement.
CAPACITY:
At the time of privatization in 1992, the capacity of Maple Leaf to
produce Ordinary Portland Cement (OPC) was 1000 tonnes per day
(tpd). A second plant of 4000 tpd was commissioned in 1998 and a
third plant of 6700 tpd will be online in 2006. This will increase the
total capacity to 11,700 tpd. The capacity of White Cement has also
increased from 100 tpd to 500tpd with the addition of a new plant. This
plant also has provisions for doubling the capacity to 1000tpd.
Presently Maple Leaf cement has 9% of the market share of OPC and is
a leading brand in Pakistan with a diverse customer base. It is also the
largest producer of White Cement in the country.
EXPANSION PROJECT:
MLCF has been quite inactive due to lack of developments in the
company. The company is operating close to full capacity and has
been for the past two years. It hasn’t entered into the export market
as all of its current production is absorbed in the domestic market.
However, with 7000tpd expansion coming online in March 07, the
growth should start to unfold. The company should also be entering
the export market then and the back to number 3 cement
manufacturers should start to get noticed.
Currently the company is operating at close to full capacity with 1HF07

capacity utilization standing at 90% while FY06 capacity utilization
stood at 93%. Despite being a sizable player in the cement sector the
company has not yet ventured into the export market. Although
currently the company’s capacity is fully utilized catering to the
domestic demand with the coming online of the capacity expansion,
45
the company plans to enter the export market to maintain market
share and capacity utilization levels. Moreover since exports are not
included in the marketing arrangement, companies with a share in the
export market can increase the capacity utilization and as a result
reduce per unit fixed costs, leading to improvement as margins. The
entry in other markets would also provide diversification to the
company’s customer base and make it less prone to demand changes
in any one particular market.
46
MLCF has different types of cement in its product portfolio. Early in
March 06 the company completed its four fold expansion in white
cement, taking its white cement capacity to 150ktpa. MLCF is one of
the two manufacturers of white cement in the country. With the
current expansion the company has been able to totally substitute the
import of white cement and is currently test marketing in the export
market. With cement due to its (neutral) white color and malleable
properties, is used for decorative and masonry purposes. Although
demand for white cement grows relatively slower as compared to grey
cement, it is a premium product and commands high margins.
Besides, white cement, the company also plans to launch a new type
of cement in the local market, i.e. oil well cement. As the name
denotes, the cement is used for maintaining oil wells. In FY04 47 oil
and gas wells were drilled in the country, while by FY06 the figure had
increased to 64.
Going forward, usage of this type of cement should grow with the
increase in oil and gas exploration activity in the country. Wells drilled
are expected to increase to 110 in FY 08. At FY 06 end share of white
cement in total cement dispatches of MLCF was around 2-3% which
should rise to 5-6% in FY 07. Going forward with the launch of oil-well
47
cement, share of premium products in MLCF’s total dispatches should
rise further.
SWOT ANALYSIS
STRENGTHS:
 High quality cements commanding premium prices.

 Operating margins should improve with the commissioning of
the expansion project due to better fuel efficiency relative to
outdated technology of some of the existing lines.
 Should benefit from further economies of scale post-expansion.
 Focusing on fast growing niche market segments.
WEAKNESSES:
 Currently catering to the domestic market and should face

competition in the exports markets.
 Highest expansion cost per ton in the sector due to delays
leading to cost over turn.
 Highly leveraged balance sheet.
OPPORTUNITIES:
48
 Expansion or Acquisition in the Southern region due to increasing
potential. (Karachi, Gwadar).
 Can export to the middle east on a large scale through Karachi
Sea Port, post construction of cement export terminal, expected
to be offered on BOT by GOP (MLCF is one of the interesting
parties of the project).
49
THREATS:
 Being a pure commodity business the company is prone to a

cyclical nature of demand of cement.
the short run.
Monopoly Control Authority (which is being given increased
regulatory powers).
KOHAT CEMENT
PROFILE:
Kohat Cement Company Limited (KCCL) was established in 1980 under
the State Cement Corporation of Pakistan. The company, subsequent
to its privitization in 1992, was acquired by Atta group, which currently
holds around 80% of the stake. All the directors, belonging to the Atta
family, are high worth individuals. The group also has major interests
in real estate and hotel business. The chief executive has an extensive
exposure to the cement industry and remained the Chairman of All
Pakistan Cement Manufacturers Association (APCMA) for six years
(Apr97-Mar03).
Kohat Cement Company Limited (incorporated in 1980) is an ISO 9001-
2000 certified company, listed on Stock Exchanges of Pakistan and
50
engaged in manufacturing of Grey and White Cements. Quality of our
products is better than approved British and Pakistan Standards. The
plant is located in Kohat about 60 kilometers from Peshawar.
51
CAPACITY:
The company currently has an annual production capacity of 0.567mln
tons of grey cement, which would be raised to 2.667mln tpa, through
expected completion of a new production line in Jul07. Meanwhile, the
company has recently installed a white cement plant of 0.135mln tpa
capacity.
Production Grey Cement White Cement

Tons/Anum Tons/Anum
Line I - in operation 567,000
Line II - in operation - 142,000
Line III - completion 2,110,000
2007
Total Capacity 2,677,000 142,000
52
POTENTIAL FOR ACQUISTIONS BY GLOBAL
PLAYERS
Cheap valuations in Pakistan create good opportunities for multi-

national cement players to acquire and cater to regional markets such
as South Asia and the Middle East. The recent sell-offs in the cement
sector were all to local investors, except for Pakistan Cement
(PCCL), which was acquired by Egypt-, based Orascom Group.
Out of multi-national cement players, CEMEX has intentions to
enter the Pakistani market either through acquisition or a joint
venture.
Dewan Hattar Cement (formerly Saadi Cement), Javedan Cement and
Dewan Cement (formerly Pakland Cement) were sold off at US$100,
US$100, US$125 per ton, respectively while Pakistan Cement was sold
for US$80/ton as the plant required further investment to bring it
online.
Pakistani cement is trading at FY08 EV/ ton of US $67, which makes

the Pakistani cement sector, the best acquisition proposition in the
region. Cement companies in India are trading at about US$130-140
on EV/ton while in China the average is over US$100. out of the listed
cement companies, relatively cheaper acquisition targets are
Gharibwal Cement (GWCL), Kohat Cement (KOHC), Fecto Cement
(FECTO) and Dadabhoy Cement (DBYC). Gharibwal and Kohat, both
have 2.1mtpa expansion projects coming online in FY08, while Fecto is
going through a 0.2mtpa de-bottlenecking exercise. DBYC does not
have any planned expansion.
Global Cement Industry Trends:

Following are the major trends in the cement industry globally:
There is a shortage of cement world wide because of the following
reasons:
53
1) Wars and reconstruction in Afghanistan and Iraq.
2) Disastrous events such as earthquakes in Iran and Tsunami.
3) World wide economic recovery resulting in huge developments
of infrastructure by developing countries.
4) Construction and engineering industries form 10-12% of the GDP
of many counties worldwide.
5) World spending on construction approximately equals $ 3.2
trillion in 1998.
6) The economic uplift of developed countries stands on the

infrastructure provided by the cement industry.
7) Newly industrialized nations such as Korea, Malaysia, Singapore,
and developing like turkey & Indonesia have used this industry
to their advantage.
54
DEMAND & SUPPLY SIDE
55
DEMAND DRIVERS
Cement consumption is classified into basic components;
1. Housing
2. Infrastructure Development
3. Increase in exports of cement
4. Wars & Disasters
All these drivers contribute about 65-70% and 30-35% respectively.

The growth in cement demand in recent years has been driven by both
these factors and both are expected to continue with the current trend
going forward. Export of cement, which also falls under either of these
categories, has also provided a boost to cement dispatches.
1) HOUSING:
With rising per capita incomes and population housing construction is
expected to accelerate going forward. If Pakistan’s per capita income
continues to rise at the pace it has been for past few years (FY00-06
CAGR:10%), it would conservatively reach US$1500 within the next 8 –
10 years. If it were to converge to its peer group average over this
period, the country needs to construct at least 1.2mn housing units
over the next 10 years, assuming population continues to grow at the
rate of 2.0%. The current average construction rate is 300k housing
units per annum, resulting in an increasing backlog. The average
household size is slightly lower for the major cities like Karachi, Lahore,
Islamabad and Rawalpindi, where the averaged household size is 6.83,
7.12, 6.11 and 6.64 respectively. Over the last few years, large real
estate development companies of international repute, such as UAE
based Emaar, Al Ghurair etc. under joint ventures with local firms,
have undertaken large-scale housing- cum commercial projects, with
great success. These structures are being built keeping in mind the
tastes and demands of the more discerning customers which no longer
settle for inferior quality.
Another emerging trend is mega housing schemes in the city suburbs,

large enough to accommodate 40-50k person and luxury condominium
style apartments and resort residential projects in the city outskirts. In
the past, would-be-occupants themselves or small-time builders and
contractors who had average projects to house 5-8k persons were
undertaking housing and commercial construction.
In the past, there was no concept of builder financing with only the
House Building Finance Corporation (HBFC) providing finance for
56
housing construction on a small scale. However, rising liquidity due to
higher expatriate remittances and loose monetary policy adopted by
the central bank (until recently), led to competition for advance where
financial institutions sought asset financing as a safe and profitable
way to grow their loan portfolios. Though real estate funds are yet to
be launched in Pakistan, banks are currently financing both; Real
estate development firms undertaking large scale projects and Home
loans for prospective clientele interested in acquiring them.
Another stumbling block in the past has been the relatively poor status
of land records leading to property title issues and hence creating
hurdles in repossession, with respect to foreclosing on a loan in the
event of default. To date, commercial banks have been very selective
in the areas (geographic) where they have extended mortgage
financing. New developments and projects have been the main focus
of the banks, given greater certainty of title. As a result mortgage
financing has grown at an outstanding pace, with development of new
residential schemes by well-known real estate developers as
mentioned.
2) INFRASTRUCTURE DEVELOPMENT EXPENDITURES:
Government’s development expenditure under the Public Sector

Development Program (PSDP) accounts for 30-35% of total cement
consumption and over the years there has been a massive increase in
the government’s budgetary allocation under this head, recording a
CAGR of 80% during FY03-06, it has been the main driver of cement
demand growth With the current fiscal year’s PSDP budget allocation
of PkR415bn, a growth of over 50% YOY, development spending will
continue to drive cement demand in the coming years. Major projects
planned include; cement lining of water course in the county, large and
small dam projects, seaport infrastructure (Karachi and Gwadar),
57
airports (Islamabad and Gwadar), road networks (concrete roads and
flyover/ underpasses), water supply and sewerage systems, etc.
3. INCREASE IN EXPORTS OF CEMENT:
Growth in exports of cement has increased from 4% to 8%. Cement

exports are expected to touch the 3million ton mark. Following are the
reasons for the growth in exports of cement:
Construction activity is rapidly rising in Afghanistan. Lower competition
from Iran even with its lower prices and easy accessibility the reason
for this change is increased domestic demand in Iran due to the
reconstruction in earth quake affected areas. Export rebates of 12.5%
Competitive prices due to export rebate, fuel efficiency and low
transportation costs.
4. WARS & DISASTER:
Wars and reconstruction activity in countries like Afghanistan and Iraq

have increased the consumption of cement many folds. The huge
developmental expenditure by their governments and the inflow of aid
from developed countries has also increased the demand for cement.
Earth quakes in Iran and tsunami in Far East led to a direct increase in
the demand for cement so that these countries could develop and
provide shelter to their people.
DEMAND OF CEMENT
Unfortunately, Pakistan the recent past was trailing behind all other
developing countries in the region with lowest per capita consumption
of cement as shown in the table:
58
Per C apita Consumption (Kg)
Pakistan 72 kg
T aiwan
Taiwan 1004 kg
Malaysia
Malaysia 870 kg T hailand
Thailand 600 kg T urkey
Turkey 512 kg China
China 410 kg Syria
Philippines 220 kg Iran
Vietnam 126 kg Mexico
Turkmenis 159 kg Philippines
tan Vietnam
Indonesia 139 kg
T urkmenistan
Sri Lanka 106 kg
. Indonesia
India 89 kg
Sri Lanka
Country Per Capita Consumption
India
(Kg)
Pakistan
59
THE CONTROVERSY
Under the government’s Water Vision-2016, the GoP plans to

construct five large dams including Bhasha-Diamer Dam(BDD),
Akhori Dam(AD), Munda Dam(MD), Kurram Tangi(KT) as well as
Kalabagh Dam(KBD) along with numerous smaller water reservoirs.
Although KBD’s construction go-ahead has note been announced yet,
it is still on the government’s agenda. But due to parliamentary
election scheduled for next year, the current establishment is quite on
the KBD issue, for now. As soon as the electoral process is over and
should the current government stay in power, developments on this
front will start to roll.
However, in terms of when cement consumption can

commence, out of the 5 mega dam projects, KBD, MD, AD and
BDD’s feasibility studies are complete. KBD’S design is ready and
construction can commence, but due to political opposition the project
has been stalled. MD’s design study is expected to be completed by
Jun’07, after which construction can commence Jun’08 onwards, while
AD’s design study is expected to be completed by Dec’07 and
construction can commence Dec’08 onwards. BDD’s design study was
recommended for revision and is expected to be complete by Mar ’08
post which construction can commence in Mar ’09.
Kurram Tamgo and Skardu Dams are still at feasibility stage, which are
expected to be finalized by CY08. Design and technical aspects would
take another year or so thereafter, before construction can commence
and the projects start contributing to cement demand. Since
commencement of all there projects is still 2-3 years off, they will not
contribute to incremental cement consumption for now but
nevertheless for the medium term, the dams issue will only help to
quell fears for those concerned about the excess supply situation in
the cement sector.
Keeping in view the government target to complete all 5 major dam

projects by the year 2016, the government has decided to immediately
prepare and negotiate a US $17 billion, 15 year business plan with four
leading international lenders (WB, ADB, IDB and Saudi Development
Fund) for the construction of three major dams in the country. The
remaining two dams i.e. Munda dam and Kurram Tangi dam are in the
process of being given to the private sector for construction. For this
purpose,
The government has setup a taskforce comprising of the officials from

the Ministries of Finance and Water and Power, Economic Affairs
60
division of the Cabinet, WAPDA and the Planning Commission. As per
plans, the GoP is aiming to negotiate a package deal for all the 3
projects. Out of the estimated cost of IS$6.5bn for Bhasha- Diamer
dam, US$6.2bn for Kalabagh dam and US$4.44bn for Akhori dam, the
government is seeking loan amounts of US$2.96bn, US$2.84bn and
US$1.42bn respectively.
Funding for the dam projects should not be a problem for government
as international lenders have already shown their willingness to
finance the projects to meet future water shortages in the country.
However, there are political and social hurdles involved to the
implementation of these projects. For this reason, the government has
set up inter- provincial committees to assist in developing consensus
among the provinces. Moreover,
WAPDA would also be launching an awareness campaign next month

throughout the country to educate the population, especially in the
rural areas about the merits of having dams and improving water
management in the country as well as to clear misconception
regarding the demerits of such projects. Regarding the resettlement
issue, the Ministry of Water and Power is working on a National
Resettlement Policy, to assist in the relocation of the affected
population as well as provide means to earn livelihood. Moreover, the
government had already earmarked funds for land acquisition and
relocation costs for affected areas in the FY07 budget. It is expected
that the government will complete the land allocation during 2HFY07.
The construction of these mega and medium dam projects, should
consume over 12mn MT of cement, translating into average
consumption of 2.5mtpa over a period of 5 years. Out of the major
dam projects, Basha-Diamer dam is likely to benefit Askari Cement,
Bestway Cement, Dewan Hattar and Fecto Cement on the basis of
location proximity, while Kalabagh Dam is likely to benefit Maple Leaf,
Pakistan Cement, Pioneer Cement and Fauji Cement. Likewise, Munda
dam project is likely to benefit D.G. Khan Cement, Zeal Pak Cement
and Thatta Cement, while Akhori dam is expected to benefit Pakistan
Cement, Pioneer Cement and Flying Cement.
EXPORTS
The present scenario in the Middle East has opened up opportunities of

export for Pakistani cement to Middle Eastern countries. Pakistan is
already exporting cement to Afghanistan. In March 2005, exports to
Afghanistan reached 163 thousand tons. This export will increase as
the construction and infrastructure activity is gaining momentum in
61
Afghanistan. One estimate is that demand will exceed five million tons
in coming years. Iran is coming up with major infrastructure work,
which is expected to suspend its supply to Afghanistan and open up
further opportunities. Export prices of cement have registered a
phenomenal rise from $26-30 per ton at the start of financial year
2003 to current $40-50 per ton. In view of increasing prices and better
margins, more companies are entering into Afghan market. The
demand of Pakistani cement is expected to continue to grow at the
rate of 20 per cent for about four years to come. It may then follow
traditional growth rate of seven per cent per year. Announcement of
major dams will dramatically increase this demand. Challenges ahead;
many factories in the Gulf region are coming up with new plants, some
of which with added facilities. A total of 25m mtpa of additional
capacity is expected to come in the market over the next 18-24
months.
CEMENT EXPORT TO INDIA:
The cement export to India is very low as compared with other

countries and stands at only six percent of the total cement export of
the country. The industry is facing different types of problems in
exporting this commodity, including packaging problems and different
objections from the Indian importers. The cement export to India would
remain low till December and at the start of next year the exports
might improve gradually.
The cement industry in the month of September exported around

550,000 tons of cement to different countries including Afghanistan,
African and Gulf countries and India. While the cement export of India
remained at only 11,500 tons or two percent in September, the
situation improved a bit in October but is still lower than expectations.
Pakistan exported 340,000 tons of cement to different countries in
October and managed to export only 20,000 tons or less than six
percent to India in the same month.The production of cement is very
much high but the transportation and packaging problems are
hindering the exports.
Analysts suggest that exports could only be enhanced if transportation

is done through road instead of rail or other means. The road
transportation is cheaper and carries more stocks, thus increasing the
export and decreasing the cost. The Indian importers are also making
different kinds of demands including writing of Hindi manuscripts on
the packaging bags.
Local cement manufacturers are exporting cement to Middle East and
African countries and a couple of months back, around a dozen
62
companies have applied for Board of Indian Standards (BIS)
certification and more than five cement manufacturers have started
exporting cement to India. The number of exporting companies is
expected to increase.
EXPORTS TO AFGHANISTAN:
Export of cement to Afghanistan is another reason for the overall

increase in exports. Due to this the proportion of exports in cement
sales has now increased to 8 percent from the previous 4 percent. This
proportion is expected to improve further up to 17.5 percent by FY08.
It is believed that cement exports will touch to 3 million tons per
annum. The reasons for this estimation are increasing construction
activity in Afghanistan and lower competition from Iran.
Donors had pledged grants to Afghanistan in excess of US$ 3 billion.
Early estimates had put the figure of annual investment in Afghanistan
at US$1 billion with 15 percent (US$ 15 million) share committed for
cement consumption. This represents very bright prospects for
construction activity in Afghanistan and the results are evident from
the demand for exports materializing from Afghanistan.
IRAN – A THREAT TO PAKISTANI EXPORTS:
Iran is the major competitor of Pakistani cement in Afghanistan. Due to

the cheaper cement, the market share of Iranian cement was much
higher than Pakistani cement. Previously, Iranian cement prices were
much lower, i.e., US $32 per ton as compared to Pakistani price of US
$70 per ton. However, Pakistani exporters have now become more
competitive and are exporting better quality cement at US $30 per
ton. Moreover, Iran was initially exporting 10 percent of its production
to Afghanistan, but with an increase in its domestic demand, Iran is
now concentrating on its domestic market. This is likely to improve the
market share of the Pakistani cement. In addition to Afghanistan, Sri
Lanka, Bangladesh and Vietnam are being explored as new
destinations for cement exports. Industry sources indicate that there is
a potential to export 2 to 3 million tons per annum of cement to these
countries.
63
CEMENT EXPORTS IN THE STATE OF RECESSION:
The cement industry people say that the current domestic

demand leaves a surplus of 15 million tons of cement, and the
country has an estimated export potential of 1.2 million tons of bulk
cement per annum, as well as 600,000 tons of bagged cement and 1.2
million tons of clinker per annum. New plants are coming up in various
countries and will start production in the next two to three years.
Pakistan can make efforts to export three million tons per annum
during the next two to three years.
The cement industry, however, ruled out any dent in the

domestic prices in case cement exports are enhanced in the future.
Pakistan’s cement industry is again in a state of recession as the
annual production capacity has increased to over 35 million tons and
will further go up to 39 million tons as compared to the installed
capacity of 17 million tons in 2005.
The local demand is increasing, but has not kept pace with production
and is likely to increase to a maximum of 22 to 23 million tons per
annum.
The present FOB rates for export of cement and clinker to

compete with India, Indonesia and China are $47-48 per ton FOB
Karachi for bulk cement, $36-37 per ton for clinker and $48-53 per ton
for bagged cement. These rates are very low and it will be possible
only to compete with these countries, if the government gives
incentives. Without incentives the industry is quoting $53 per ton
which is very high and does not compel industry people to enter export
market with significant quantities. The industry exports clinker at
$37.5 per ton. By exporting only 20 per cent of the surplus capacity,
Pakistan may well be in a position to earn $125-150 million per annum
by exporting three million tons at an average rate of $45 per ton.
However, the government needs to address some of the problems of
the industry so that the producers could fetch good results on the
export front. At present a token rebate of Rs25.08 per ton is allowed
on cement export and there is no rebate on clinker export.
LUCKY CEMENT- WILL IT PLAY A MAJOR ROLE IN

EXPORTS?
Karachi—Pakistan has captured a greater chunk of the
increased reconstruction and rebuilding activities in Afghanistan,
64
which resultantly are bound to boost export of cement from Pakistan.
On the home front, housing activities along with rehabilitations after
the earthquake in northern parts of the country are expected to take
place at a fast pace, fuelling cement demand in the country. It is
expected that overall industry sales growth during FY06 to reach at 12-
13 per cent. The government on its part continued to accord priority to
infrastructure development, which is also expected to prove
instrumental for cement demand growth in the coming years. Among
the big cement manufacturing units, Lucky Cement which is being
tipped as the leader of the industry is to be attractive at current levels
on the back of higher profitability expectations and favorable cement
industry outlook.
Cement demand growth expectations are sanguine on greater

housing and construction activities, higher allocations for
infrastructure development and increased export penetration. Lucky
Cement’s FY06 earnings are expected to mark 116 per cent increase
to Rs1, 786million. Meanwhile 104 per cent growth in sales and higher
gross margins are to be the key contributors. Overall cement industry
sales during the first 11 months of FY06 depicted approx. 11.4 per cent
upsurge to 16.5m tons with local sales soaring by 13 per cent while
exports depicting decline at 5 per cent. Lucky Cement is on the
forefront in aggressively pursuing expansions and enhancing its
geographical portfolio. The company is increasing its annual cement
production capacity over four times by the first quarter of FY2007.
It is expected that FY07 to be another year of exceptional

growth for Lucky Cement on the back of higher sales volumes
ensuing from the commencement of commercial production of the
Karachi plant. Sales revenues are expected to mark 98 per cent
increase to Rs16bn and earnings are projected to soar 133 per cent to
Rs4, 157million. However, earnings are likely to taper-off from FY08 as
industry-wide capacity enhancements come on-line. Trading at a
prospective FY07 PER at 6.3x, our target price for Lucky Cement is
Rs118.
The cement sector’s buoyant profitability growth momentum has
entered into the third consecutive year. In this context, Lucky Cement
has emerged as a major cement sector player with its visionary and
aggressive business strategies. Furthermore, the government’s
renewed focus on improving basic infrastructure is instrumental in this
regard. In line with this objective, the government has allocated a
record Rs415bn in the recent budget towards PSDP. This along with a
buoyant housing industry is expected to translate into sustainable
cement demand going forward. Lucky Cement has gained “First Mover
Advantage” over its peers by initiating an early as well as relatively
low-cost expansion plan to four-fold its production. These expansions
are to multiply Lucky Cement’s annual production capacity by over
65
four times to almost 6.8m tons compared to just under 1.5m tons
during the previous fiscal.
During 2004-05, the company initiated an ambitious expansion

project by planning to build two additional production lines at 4200
tons per day each at its existing site in Bannu division. The total
capacity at the Pizu site is to, therefore, rise to approx. 13,400 tpd
(4.1m tpa of cement) comprising of coal fuel dry process lines.
Furthermore, Lucky Cement took a marvelous initiative by constructing
a Greenfield plant in the southern region of the country. The major
reason for this new plant is to tap the un-explored export potential in
the UAE and other Middle East markets.
HOW TO INCREASE EXPORTS
Currently;
 The cement companies are entitled to a token rebate amounting
to PkR25.08/ ton on cement exports, while on clinker export,
there is no incentive.
 Beside this, export sales are exempt from central excise duty
(PkR750/ton) and general sales tax (15% of ex-factory price),
which is basically more of a pass-on benefit as export prices are
lower than domestic prices as a result of these exemptions.
 The cement companies have asked the government to consider

the increasing rebate on cement exports as it has the potential
to reduce the country trade deficit as well as contribute.
 To the governments foreign exchange earnings as well as assist
in utilizing the spare capacity in the cement sector.
 As a second option, the cement companies have asked the
government to reduce port costs (handling, wharf age etc.) at
Karachi Port.
 Currently, Karachi Port charges wharf age at PkR40 per ton on
cement and clinker while at Port Qasim the cost is almost 50%
lower. At the same time, port handling and service costs are
US$0.90 per ton for Pakistani ports while internationally port
costs average US$0.50 per ton.
66
THE SUPPLY SIDE
At present, there are a total of 27 cement plants in the country with 17

factories located in the Northern region of the country and the
remaining 10 operating in the South. The total installed capacity of the
industry as of now stands at 30mtpa. FY06 was marked with
commissioning of capacity expansion projects with Lucky Cement
bringing online one of its new lines into commercial production during
Oct-05. This set the ball rolling within the sector, with expansion
projects of other companies scheduled to arrive in FY08. These
expansions have been in the pipelines for the past few years as
cement companies, keeping in view the rapid increases in cement
demand both locally as well as internationally, planned to cash-in by
enhancing their production capacities.
67
68
LOCATION
69
ROAD BUILDING
Post the heavy rains throughout the country late last year, the
Economic Coordination Committee has decided in principle to use
cement for construction of roads. The heavy downpour caused
widespread damage to the country’s road network besides damaging
other key infrastructure. As a result, repair and maintenance
expenditure are eating into the government development budge.
70
Although the practice of making concrete roads is common in India,
which has adapted itself to the monsoon season, in Pakistan this
concept is yet to be implemented on a significant scale. The All
Pakistan Cement Manufacturers Association (APCMA) has loon been
lobbying the government for its implementation since undertaking the
current cement capacity expansion phase. The major hindrance for the
government has been the high initial cost, as concrete roads coat 60-
70% more compared to conventional asphalt roads, taking the
project’s payback to 5-6 years. However, in cities like Karachi and
other parts of the country which do not experience regular rainfall,
there has been inadequate provisioning for drainage facilities in
master pans, and with rains such as those seen in last year’s monsoon,
requiring major road projects to be redone, it seems the government
would have been better off with concrete roads.
The government has gone ahead with the initiative, with the
utilization of cement for construction of firs lane (for heavy traffic)
on a couple of highway rehabilitation projects in Islamabad region, as
pilot projects. Cement is more suitable for regions that experience
heavy rainfall/ snowfall but are also planned to be implemented in
Karachi, due to its poor sewerage systems. Future projects where
concrete roads are likely to be implemented on a significant scale are
new development schemes on the outskirts of major cities and Gwadar
city. There are broadly three methods of road construction with
concrete, each requiring different amounts of cement. Therefore, a ball
park estimate on incremental demand to be generated from this new
application of cement cannot be given at present. Nevertheless, the
decision does give comfort of increasing cement consumption,
meaning higher capacity utilization for cement companies.
PRICING OF CEMENT
The cement sector has underperformed the KSE-100 index with

a negative return of a negative 13.1% during October 2007
compared to the market return of a negative 9.8%. The cement sector
had poor 1QFY08 compared to 1QFY07 and profitability went down by
approximately 32.9% due to lower retention prices and increasing cost
of production. However, the cement industry’s dynamics have always
displayed a seasonal trend due to slow demand over the winter
months. This is reflective in cement prices as well as company stock
prices. Post winter, with an upsurge in demand, cement stocks tend to
rally; hence current weakness in cement stocks should be viewed as a
buying opportunity. Our top picks in this regard are LUCK, MLCF and
ACPL.
The KSE 100 has registered a drop of 9.8% during the last
month since October 18, following the imposition of a state of
71
emergency, but the cement sector continues to under perform the
KSE-100 index registering an average negative 13.1% return (for
cement companies in the BMA Universe). There are several reasons for
this underperformance. During the first quarter, YOY profitability was
down by 32.9%. The 34.0% growth in volumes was offset by a 28.0%
fall in retention prices which resulted in flat revenue growth. At the
same time, cost of production increased due to higher coal prices (up
30.0%), while depreciation charges were also up post expansions.
Furnace oil prices are over PKR40, 000 per ton in the local market,
which placed additional pressure on margins which have come down to
21.7% compared to 36.5% during 1QFY07.
Apart from declining profitability, cement stocks are subject to

seasonal fluctuations. The graph above shows the historical trend
in cement stocks. Stock prices tend to become bearish towards the
end of the first quarter of the fiscal year and turn bullish towards the
end of the second quarter. The rally continues till the end of the fiscal
year. Last year, cement stocks gave an astonishing return of 86.4%
during this bull-run. Infact, cement stocks have led each of the last
three upward rally’s on the KSE100.
72
The primary reason is that cement demand is subdued during
the 2Q mainly due to a slowdown in construction due to a severe
winter in the north. The northern region of the country accounts for
approximately 77.0% of the total demand in the country. As a result of
this, cement prices come under pressure and the profitability of the
industry is adversely affected. Cement prices touched their all time low
of PKR180 per bag during 2QFY07. FY06 was a very good year for the
cement industry due to robust demand and limited supply. Prices
touched their all time high of PKR400 per bag (for some
manufacturers) which fuelled the bottom-line of the cement companies
and hence pumped up their share price.
We do not expect cement prices to touch their all time low

during this quarter but stabilize around current levels of PKR195-
PKR210 in north and PKR220-PKR230 in south due to robust demand
and the export potential and hence we believe that the current
weakness in cement stocks should be taken as a buying opportunity
for handsome returns over the remainder of the fiscal year. We have a
BUY call on LUCK, ACPL and MLCF.
The cement prices after remaining in the lower side during most of the
winter season due to lower demand and higher supply condition,
finally regained an upward trend last week. The upward revision of
prices is attributed to improved demand-supply management with
revival of better coordination between sales and marketing
departments of the major producers.
In the late 90s, the cement sector went through a period of very weak
pricing power and resultantly sustained losses. However, from the
early 2000s onwards, price competition in the cement sector, although
recurrent, has been usually short-lived. The recent price competition
situation before the revival of marketing arrangement among cement
manufacturers can be attributed to the following factors:
a). The early birds who had brought their expansion projects
online were cashing in on their first mover advantage in order
to accelerate their projects’ payback before remaining cement
capacities come online and
b). Since the cement sector is still in an expansion phase,
companies whose expansion projects are yet to come online
were reluctant to discuss on the marketing arrangement and
seemed to be employing delaying tactics.
However, regarding the sustainability and willingness of cement

manufacturers to adhere to their marketing arrangement, it is not a
matter of choice but a matter of survival. With break even at over
73
PkR200/ bag for most cement manufacturers, a reasonable price in
order to maintain economic profit should be at least PkR240/ bag.
Another reasonable for sustainability of the marketing arrangement in
the past has been the concentration of the Top 5 players in the overall
capacity in the sector, with average share of capacity of the Top 5
players over 50%. Going forward, by FY08 when all the capacities
come online as scheduled, the Top players would continue to hold
approximately 53% of the sector’s overall capacity. The level of
concentration should continue to provide comfort in the ability of the
bigger players continuing to set prices and controlling competition and
hence providing stability to earning going forward.
According to sources in the cement industry, during the last few days,
cement prices in different locations of the country have increased by
Rs 15 per bag to Rs 20 per bag. Although no quota arrangement has
been made between producers, prices have started to rebound after
meetings between functional heads especially marketing people of
various cement companies, as demand has remained very strong.
After falling by 55 percent from its peak level of Rs.400 per

bag recorded in April 2006 and by 32 percent from its average of
Rs.263 per bag recorded in financial year 2006 to settle at Rs.170 per
bag to Rs.180 per bag in December 2006, cement prices have started
to rebound as currently they stand in the range of Rs.185 per bag to
Rs.195 per bag in various locations, up by Rs.15 per bag to Rs.20 per
bag. The upsurge in prices during the last few days has been seen
mainly due to consensus among the marketing heads of various
cement companies who believed that prices were very low and they
need them to go up for their survival, the demand played a role, which
has remained strong at 26 percent for six-months financial year 2007,
above the expectations.
74
The price increase is inline with expectation since as per
analysis historically commodity prices remained cyclic where
prices go down only once after every two to three years. According to
the sources a conflict regarding the quota allocation or quantity
restriction, which is the second component of the quota arrangement,
however, still remains. And at this point in time, producers continue to
operate on 100 percent dispatch policy, though they have agreed not
to decrease prices to get higher market share. Moreover, going
forward, they plan to further increase prices and make it a weekly
feature once peak demand season starts i.e. from middle of February
onwards. Due to this price rise, the market can also expect demand to
jack up artificially as cement dealers might indulge themselves in short
time hoarding in order to benefit from the price hikes.
Currently, result season for the period ended December 2006

has started at the Karachi Stock Exchange (KSE). As expect
profitability of the cement sector to decline by 60 percent to 70
percent in second quarter of financial year 2007 versus second quarter
of previous financial year and even more than the 31 percent observed
in first quarter of current financial year since prices remained
depressed throughout the quarter. In second quarter of current
financial year, market might see most of the cement companies going
in the red. Nevertheless, with the recent rebound in prices and more
hikes to follow suit, third and forth quarter for the cement industry
expected to be better than the first two quarters.
For the full financial year 2007, listed cement sector is

expected to post a decline in earnings in the range of 40 percent
to 50 percent. The sector posted superb profitability growth in last four
year, financial 2003 to financial year 2006, with a CAGR of 97 percent.
However, beyond financial year 2007, however, cement sector profits
are expected to grow positively albeit at a lower pace.
INTEREST RATE
The cement industry is able to borrow at 1-2% interest +KIBOR
(Karachi inter bank open rates) thus earning a lot more than paying in
interest expenses. The expansion in the late 90s was financed at the
interest rates in the late teens at around 16-20%, whereas the current
expansions are at lower rates of 6 months KIBOR (10.5%) plus 1-2%
markup. Moreover, in the late 90s the supply glut had affected the new
entrants in the sector who saw losses eroding their equity before
commencement of project payback. To counter inflationary pressure,
the central bank has already undertaken further monetary tightening
with a hike in the discount rate and by increasing cash reserve
requirements for commercial banks.
75
Interest rates having further increases in FY07 to date, with 6-months
KIBOR (the benchmark for corporate lending), increases from 9.2% at
FY096 end to 10.3% as of 30 Sep ’06. The impact of this development
would prolong payback periods for the expansion undertaken by the
cement manufacturers and continue to take a higher share of
operating profits for the company. With moderation in monetary
excesses and core inflation in 1 HF07, it is expected that SBP will
revert to a neutral monetary policy in CY08, it is estimated that
interest rates will inch downward in 2HF08. This should help to reduce
financial cost for cement companies, going forward.
INTEREST PAYMENT:
For cement companies, there is expectation of gearing ratio
and financial charges to peak in FY07, and from then onwards,
decline as the companies began to repay their debts. Although most of
the companies should see cash outflows due to commencement of
debt obligations, with comfortable reserves built-up by the cement
manufacturers in the last few years due to strong profitability in the
sector. This should help cement manufacturers to survive higher
interest rates and debt repayments in the medium term. Moreover, the
companies have also funded their expansion through right shares and
internal cash generation
.
While all the cement companies have financed the major
portion of their expansions through debt and would be negatively
affected by the interest rate hike, companies such as Lucky Cement
(LUCK) and Pioneer Cement (PIOC) had undertaken expansions earlier
under the low interest rate environment should benefit as their loan
repayments have commenced and they are seeing declining
outstanding loan balances on their books. Similarly, Attock Cement
(ACPL) which was wholly equity financed and initiated debt financing
to its current expansion plan is relatively low leveraged and should be
comfortable on its interest coverage. The companies that are likely to
be the most affected are Maple Leaf (MLCF) and D.G. Khan (DGKC),
which should see their expansions coming online in the current fiscal
year and their repayments should commence thereafter. On the other
extreme, companies such as Cherat Cement (CHCC) and Fauji Cement
(FCCL) that are not going for any expansion, have low debts on their
books. Moreover, outstanding loans of such companies should decline
further with upcoming repayments and they should not be concerned
about the high interest rates. Fauji cement although has announced an
expansion plan but the expansion is targeted for the time when the
current spare capacity is be fully utilized, which is expected to take
76
place by FY10. All in all, since sensitivity to interest are an across the
sector phenomenon, impact of rising financial costs should be easily
passes on by the cement manufacturers. Moreover, higher interest
rate should help to ward off pressure on the cement manufacturers to
reduce cement prices from the government.
METHODOLOGY
77
PORTER’S FIVE FORCES MODEL FOR THE
CEMENT INDUSTRY
Threat from
New Entrants
Bargaining Rivalry among Bargaining

Power of the Existing Power of
Buyers Competitors Suppliers
Threat from
Substitute
Products
78
THREATS FROM THE NEW ENTRANTS
Barriers to entry:
Since the industry requires a heavy investment to set up a project for
cement manufacturing so this reduces the risk from the side of new
entrants. When it comes to land, around 850 acres is required to install
a project like cement and in order achieve the economies scale the
capacity required is even greater the figures 945 acres is required.
Raw Materials:
Cement plants can either buy coal in raw form and then process it to
suit their demand or buy processed coal from a coal processing and
distribution company (on the pattern of existing gas transmission and
distribution companies). The first option is not economically viable.
Therefore, establishment of coal processing and distribution
companies seems to be a better option also offering economy of scale
and cost optimization.
Regulations:
Deregulation after accession of Pakistan to WTO is expected to open
the window of competition from cheaper markets. There may be no
tariff after this deregulation on import of cement allowing its entry into
Pakistan from cheaper market at lower rate. Cement from cheaper
markets may also block Pakistan’s export of cement to its neighboring
countries. The domestic cement industry will have to gear itself to
combat market competition and for that it needs consolidation.
BARGAINING POWER OF THE BUYERS
Bargaining power of customers is quite low as user of cement from a

large and diverse group lacking unity. The government does however
step in if prices rise sharply in a short period of time. Since the cement
industry in Pakistan follows an oligopolistic market structure, the
suppliers make up an organized, collective force, which makes tacit
price and quantity agreements possible.
BARGAINING POWER OF THE SUPPLIERS
79
Raw materials are easily available, so this in turn does not favors the
suppliers, as they can’t play with the prices, this is due to the number
of suppliers and hence prices are very competitive. Pakistan has
abundant basic raw materials for cement industry i.e. gypsum and
limestone. There are large deposits of gypsum in several regions of
NWFP, the Salt Range of Sargodha and Rawalpindi divisions and hilly
areas of Dera Ghazi khan and Dera Ismail Kahn. Large reserves of
gypsum have also been discovered at Daudkhel and Khewra in Punjab.
At present, the largest suppliers come from Mianwali and Jhelum
districts.
80
Rich deposits of limestone have been found at Mianwali, Jhelum, and
Sargodha divisions. This makes both of these raw materials very easy
available and thus have prices which are one of the lowest in the
world.
THREATS FROM SUBSTITUTE PRODUCTS & SERVICES
Cement is the only sole product in its category and has no competition
whatsoever. . There are no known substitutes for cement at present,
and thus there is no threat of substitute products. Cement is a basic
commodity, which is required for construction and development
projects. The government has decided to encourage the private sector
to manufacture various products of gypsum, especially gypsum plaster
that can be used as a substitute for cement in the construction sector.
RIVALRY AMONG EXISTING COMPETITORS
All Pakistan Cement Manufactures Association (APCMA) is the

representative body which is responsible for setting prices, and
mingling with demand and supply to maintain them. The cement
industry in past has exploited the consumer by forming cartel and
increasing the rates arbitrarily. There is no proper way by which
government could interfere and break the cartel but instead they have
to bow there heads on their demands.
With excess supply coming online, there is a likelihood of violation of
quotas and price floors under the marketing arrangement, particularly
by the weaker players. This might lead to temporary setbacks and lead
to reduced sector margins
81
SWOT ANALYSIS OF CEMENT INDUSTRY
STRENGTHS
ORGANIZED SECTOR:
Cement industry is a highly organized sector. The total number of
cement plants in Pakistan is 25. The industry is highly capital
intensive. The capital cost of 2000tons/day plant ranges between Rs.3
billion to Rs.4 Billion. Thus only experienced and big players enter this
industry.
HIGH QUALITY:
Cement produced in main companies is of good quality. It is of
attraction for export, and for high-importance projects.
EXPANSION:
Currently almost all of the cement plants are undergoing conversion
and expansion plans. Capacity expansion of 13million tons will go
online between FY05-FY09. Most of the companies are going to benefit
from economies of scale after expansion.
CAPACITY UTILIZATION:
82
The capacity utilization for the sector also improved to 91.32 per cent
from 89 per cent last year. Cement exports during the said period have
increased by 40 per cent while the local cement dispatches have
grown by 18 per cent.
GOVERNMENT POLICIES:
Financial sector reform, increase in worker remittance, higher
government infrastructure spending and fiscal incentive for the
housing sector will serve as catalyst for higher growth.
During the last two years, the Public Sector Development Programme
has been considerably enhanced and this has coincided with greater
demand for cement from the private sector largely for construction
activities in the housing sector.
PUBLIC SECTOR DEVELOPMENT PROGRAM:

During the last two years, the Public Sector Development Program has
been considerably enhanced and this has coincided with greater
demand for cement from the private sector largely for construction
activities in the Housing sector.
LOW TRANSPORTATION COSTS AND ENERGY EFFICIENCY:

Pakistan is having competitive edge of low transportation costs and
energy efficient plants.
ECONOMIC GROWTH:
Cement industry has a direct link to the economic growth of the
industry. Better roads, airports, proper canal lining and sea ports form
major infrastructure for every industry.
WEAKNESSES
ECONOMIES OF SCALE:
In the Gulf countries, the average plant size is 1.6m mtpa while in
Egypt, it is over 3m mtpa. The relatively small size of individual
cement factories in Pakistan suggests that a significant capacity is
currently unable to benefit from the economy of scales.
HIGHER MAINTAINANCE COST:

Majority of the companies have plants of Chinese origin. They have a
higher long-term maintenance costs, as compared to western plants.
FULL-CAPACITY UTILIZATION:
83
Almost all the companies are already running at full capacity.
Therefore, any hike in demand in form of construction of dams or
infrastructure will not be met. Thus resulting in major shortfall.
CONCENTRATION OF PLANTS IN NORTH:

Majority of the plants are located in the northern region, mainly in
NWFP. Thus any development in the southern region is mainly
augmented by northern region plants. This results in higher
transportation costs.
NON-COOPERATION OF GOVERNMENT:
There is non-cooperative gesture of the government.
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CEMENT PRICES:
Cement prices in the international market are very tight, looking at the
prevailing demand.
EXCISE DUTY:
The government has not taken any step for abolishing excise duty on
cement items, which is clearly negating of the achievement of lowering
prices for the public and for development activities.
UNLIMITED IMPORTS:
It is quite contrary to APCMA’s recommendations of allowing import of
cement up to 500,000 metric tons on confessional basis as a buffer
stock. The government has permitted unlimited imports, which can
provide roots for damaging the domestic industry if neighboring
countries start dumping the commodity into our markets
OPPORTUNITIES
INFRASTRUCTURE DEVELOPMENT IN PAKISTAN:

According to the “Medium Term Development Framework”, the
government will gradually increase its allocation for the Public Sector
Development Program from Rs272b to Rs597b in FY'10, which is likely
to generate further demand in coming years.
Construction of large dams, mainly KALABAGH, BASHA-DIAMER,

MUNDA, AKHORI, KURRAM TANGI, NAI GAJ, and SKARDU, is going to
require huge amounts of cement. It is estimated that these dams will
require around 15 to 20 mn MT of cement.
PER CAPITA CONSUMPTION:

Pakistan’s per capita cement consumption is amongst the lowest in the
region. The government has started massive spending on
infrastructure development- road construction and water management
measures etc., which was the neglected area in late 1990s due to
deteriorated balance of payment conditions of the country. The
country used to spend a major part of the budget on debt servicing
that left no room for development expenditures. The situation has
almost reversed now. The per capita consumption is expected to
increase phenomenally in coming years, as a result.
POTENTIAL IN SOUTHERN REGION:

At present, 80% of the consumption is at the Northern Region. There
lies a huge potential for the cement companies in the Southern region,
specially in Karachi and Gawadar.
85
EXPORTS; PRESENT AND POTENTIAL:
There in lies a huge potential for export of cement. Can export to
Middle-East on large scale through Karachi sea port, after construction
of cement export terminal, expected to be offered on BOT by GOP.
India is also a huge market for Pakistani cement. A lot of expansion is

going on in India. With relationships getting better, it is anticipated
that Pakistani Cement companies will be able to gain a huge market in
the shape of India. Presently some of the cement companies from
Pakistan are exporting cement to Afghanistan, Iraq and UAE only to
maintain their presence in these markers. After completion of major
expansion plans in Pakistan in 2007, there would be surplus to export
in these markets.
THREATS
CLYNICAL NATURE OF BUSINESS:

Cement being a pure commodity business, the industry is prone to
cyclical nature of demand of cement.
DELAY IN CONSTRUCTION OF DAMS:

Dams are a major source for the cement industry. Due to political
instability and inconsistency of policies, the construction of dams is
being delayed. This will dent demand of cement in short run.
POLITICAL INSTABILITY:
This threat is true for all the industries. Political instability has harmed
industry for over two decades, and it seems as if this will continue for
some time.
MONOPOLY CONTROL AUTHORITY:

A big threat to cement industry is the onging tussle between the
cement manufacturers and the Monopoly Control Authority. The
Authority is being given increased regulatory powers, and it is
exercising more aggressive price controls.
IRANIAN CEMENT INDUSTRY:
86
Currently Pakistan is a major exporter to Afghanistan, and it is also
aiming at exporting to Middle-Eastern countries. However, it should be
noted that Iran is going to enter these markets soon. Its cement
industries, which are currently focusing on internal development, will
soon compete in international market.
87
CONCLUSION
Cement industry is among the most advanced industries in

available raw materials. With the passage of time, the industry has
grown gradually. Routing back to the history of the sector, there were
only five cement plants (four in West Pakistan and the other one in
East Pakistan). During the initial era, the cumulative capacity of all
these units was about half a million tons per annum in comparison with
the demand of over a million tons. By 1972 the total number of cement
plants increases to 14 and the production capacity also surge to 2.5mn
tons. At present there are twenty-four cement manufacturing plants.
Of these operational plants, 20 units are established with in the private
sector where as 21 units are listed with the Karachi Stock Exchange.
We expect Cement sector to move concurrently with the

growing economy. The expectation of strong demand is based on
the back of government focus on infrastructure development,
reconstruction activities in earth quake region, housing activities,
construction of big dams, as well as economic activities in the
neighboring/ regional countries. Cement demand is expected to grow
at the annual rate of 12% in next 3-4 years. Cement demand is
expected to reach around 21-22 million metric tons by 2007-2008
against current demand standing around 15 million metric tons.
Growth of this industry is dependent as it is on increasing construction
and development projects; it’s fate, whether it likes it or not, is tied up
with the stability of the country. Dams, roads, ports and other
development are dependent on the policies of the government. Past
governments have not attached importance to this so it is not a
foregone conclusion that any and every government will undertake
massive public sector development. On the positive side, however,
there is always Afghanistan. Once donor money starts coming in, the
demand for cement in Afghanistan will rise, and as cement is a basic
commodity in reconstruction, the bulk of it (if not all) will have to be
shipped from Pakistan regardless of which government is in power.
88
RECOMMENDATIONS
These are the recommendations that can be implemented in the

cement industry to reinforce its success:
GOVERNMENT’S ROLE:
There are many players in the industry that are not functioning
efficiently. There needs to be certain minimum requirements that
should be fulfilled by the manufacturers. The government can give
deadlines to the manufacturers for implementing those measures,
which if not implemented, will lead to the closure of the companies.
These minimum requirements can be conversion to low-cost coal
powered plants.
The government can initiate more infrastructure projects to develop

the country and, in turn, developing the industry.
The government should strengthen its regulatory framework and

regulatory body Monopoly Control Authority (MCA) to look into
malpractices of cartel-forming as is the case with the All Pakistan
Cement Manufacturers Association (APCMA). The government has to
get costing data on cement industry from independent sources and
strictly implement its anti-trust law.
There should be more reductions in the government levies to make the

industry more competitive in the export market.
Government should take any step for abolishing excise duty on cement
items, which is clearly negating of the achievement of lowering prices
for the public and for development activities. It is incomprehensible
that excise duty has been imposed on cement, which is being
produced in the country in abundance.
TECHNOLOGY:
The industry is dominated by a few giants along with relatively smaller
players. Thus, these giants need to get involved into more research
and development to come up with new varieties of cements, different
production methods and other such innovations.
Material sciences are developing rapidly the world over, and advanced
construction materials are being produced, in particular, for enhancing
quality, strength and efficiency in the concrete construction. The
industry should, therefore, make investment in advanced cement
technologies, over short and long term horizons, in the wake of recent
destruction due to earthquake
89
TRANSPORT SECTOR
Just as the transport sector of China uses cement in road construction
rather than asphalt, Pakistan can also implement the same. With more
and more road development, the industry would also benefit.
FUEL COST
Cement industry is highly energy intensive and fuel cost constitutes
about 30 per cent of the total cost of cement manufacturing. If all the
cement plants switchover to coal and capacity utilization remains the
same, the industry will be able to save over Rs 5 billion annually.
EXPORTS
It takes around three days for a single ship to be loaded with cement
for export. If this ship loading/unloading time could be reduced, we
would be better able to handle the exports more quickly.
There should be easy and quick procedures at the ports to facilitate
the cement exporters with the process.
VISION
The industry needs to have a long-term vision. It is essentially
important for it also to adopt measures to reduce its present
production cost further by improving production efficiency, conserving
energy and employing advanced techniques, such as installation of
advanced process controls and developing bulk handling system.
PRICING
In order to be competitive, the industry is required to arrest the price
increase trend, as cement production cost would reduce as a result of
economical expansions of various existing units.
A schedule for maintenance should be prepared. In house dust
emission measurement i.e. intensive monitoring of Bag-House-Filters
should be carried out to gain more information about its effectiveness.
BAG FILTERS
High temperature resistant fabric material like Nomex should be used
in filters of Clinker Bucket Conveyor to prevent the burning of bag
fabric from hot Clinker particles, which results in small holes in bag
fabric. The cost of Nomex fabric is approximately two times higher
than polyester needle filter.
WASTE MANAGEMENT
90
Improvement in maintenance is to prevent spillage and leakage- by
making an inventory for the leakage/spillage, and investigating the
cause of leakage and accordingly planning the maintenance. Improved
recycling of the collected spillage – e.g. through implementing a chute
system, collecting dust at a special recycling point, removing metal
scrap with a magnetic separator. Re-cycling of Cr-containing refractory
bricks in cement production instead of selling them to the down
stream use – after crushing the Chromium-bricks in the Crusher it
should be used as raw material, this will prevent the dispersion of toxic
waste.
91
PERSONAL PROTECTION EQUIPMENT
To control and minimize the risks at the workplace, it’s necessary that
structural attention be paid to safety. Although some system exists
with regard to Occupational Health & Safety (OHS) in most of the
cement plants, it requires refinement with identification of reasons of
the accident and suggesting measures to avoid such happenings in
future. Following steps should be specially looked into.
Exposure to Health Risks: The health risks of working in a cement

plant are associated with working with rotary equipment, the
inhalation of dust, exposure to noise and vibration. Besides these risks,
the people working in the quarry are exposed to the risks of working
with explosives. The management should define procedures on
explosive handling and other precautions during blasting. Following
measures are recommended to the Management of cement plants for
prevention of production area accidents in the factory.
REGULATORY FRAMEWORK
Sector is not regulated properly and environmentally harmful practices
such as using cheap coal as fuel go unchecked. Vested interests are
the reason for inconsistent policies; government tends to ignore any
social agitation. For the cement sector, a proper regulatory framework
for pricing as well as keeping a check on environmentally harmful
practices should be adopted .Government should take care of not
allowing low grade cement to be imported, which if used could
endanger the stability of load bearing structures in view of its lower
strength.
EXPLORING NEW MARKETS

Major buyers of cement had been Afghanistan and Middle Eastern
countries. If government takes pro-industry steps, the volume of
cement exports can increase substantially besides capturing various
new markets
TRANSPORTATION COSTS
There is an increase in transportation and energy costs which has
impact on the cost of production of cement. And the hike in truck rates
for carriage of coal from Karachi to the upcountry and for general
distribution of cement to the various urban markets from the plants
mostly located in the rural areas. So it is recommended that the
92
ministry of railways to provide wagons on priority to cement units so
that pressure on the truck and road network may be reduced
93
BIBLIOGRAPHY
• www.dailytimes.com.pk
• http://www.cpp.org.pk/etpibrchr/cement-brochure.pdf.
• www.nation.com.pk
• www.businessplus.tv/Programme/pdf/Pioneer%20Cement%20Report.pdf.
• AKD Research report on Cement sector (February 2007)
• Ismail Iqbal securities (Pvt) Ltd report on Cement sector
• www.pakistan.gov.pk/ministries/yearbook0506.pdf
• www.wikipedia.com
• www.dawn.com
• http://www.jang.com.pk/thenews/investors/aug2004/if.htm
• http://www.researchandmarkets.com/reportinfo.asp?report_id=300358
• http://www.dawn.com/2005/10/24/ebr8.htm
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Analysis of Pakistani Industry

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Analysis of Pakistani Industry

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Analysis of Pakistani Industries

Sehrish Khan Rafat- 4666

Mahjabeen Hassan Khan -5633

SWOT Analysis of the

We would like to thank, our course instructor Dr. Irshad Khan,

This surely has been a memorable and learning experience. We

As far as exports are concerned majority of or export heading for

To sum up, cement industry is among the most advanced industries in

He said port costs in Pakistan are very high as compared to India,

Developments in the sector:

Current stance of the cement sector:

Iran would get benefit in terms of price as cement prices in Iran is

THE MANUFACTURING PROCESS OF CEMENT

1. Processes used for manufacture cement:

In view of these limitations the wet process has become outdated.

The advantages are:

 This process enables the processing of a water range of raw and

 The raw material is preheated and partially calcium resulting in

 The kiln being shorter in length requires less space in erection

3. Mining and Milling

This dig out is very different to the normal type of cement-linked

4. Pre-heater and Pre-claimer:

6. Packaging and Distribution

But demand for cement was growing rapidly (at an average of 8% a

Percentage growth of cement industry

Presently, a number of factors are attributed to this tremendous

Per Capita Consumption (Kg)

An analysis of the competitive environment reveals the

Cement exports constitute an integral part of the supply and

Raw material Punjab NWFP Sindh Baluchist

A comparison of taxation and retail prices with other regional countries

In short, cement industry is among the most advanced industries in

At present there are twenty-seven cement manufacturing units (out of

At the time of independence in 1947, only one or two units were

Following this period, the government became complacent and the

The company has plans to undertake a further expansion of 5000tpd

 Aggressive capacity expansion has decreased the company’s

 Construction of mega dam projects as well as ongoing

 Being a pure commodity business, the company is prone to

Domestic Sales 14.03% 15.51%

Export Sales 37.30% 38.25%

Clinker 24.81% 0.00%

Sub Total 36.28% 38.25%

Total 18.84% 18.29%

Nishat Group acquired DGKCC in 1992 under the privatization initiative

 High quality cements commanding premium prices.

 Confined to the Northern region only.

 Construction of mega dam projects as well as ongoing

 Majority of the cement capacity expansions have been

dynamics would make it feasible. Nevertheless, the company's interest

ANALYTICAL APPROACH TO FURTHER EXPANSION:

Currently the company is operating at close to full capacity with 1HF07

 High quality cements commanding premium prices.

 Currently catering to the domestic market and should face

 Being a pure commodity business the company is prone to a

Production Grey Cement White Cement

Cheap valuations in Pakistan create good opportunities for multi-

Pakistani cement is trading at FY08 EV/ ton of US $67, which makes

Global Cement Industry Trends:

6) The economic uplift of developed countries stands on the

All these drivers contribute about 65-70% and 30-35% respectively.

Another emerging trend is mega housing schemes in the city suburbs,

2) INFRASTRUCTURE DEVELOPMENT EXPENDITURES: