3. STUDY OBJECTIVES & HYPOTHESES
This report aims to evaluate the cement industry in Pakistan with respect to growth and the
competitive structure of the market.
The objective of the research will be two-fold:
1. To determine Industry dynamics by evaluating historical performance and background as
well as market structure and degree of competition.
2. To identify factors that drive growth and capacity and expansion cycles.
Hypotheses for this research study are developed as follows:
Hypotheses 1: The cement industry follows an oligopolistic market structure.
Hypotheses 2: The cement industry will follow economic trends of the country.
METHODOLOGY
The research methodology largely employed secondary research for data collection and
analyses utilizing industry research reports, publicly available financial statements and
literature on the industry available online.
A minor part of primary research entailed gaining insight on the industry’s future outlook
through one-on-one interviews with industry experts.
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4. HISTORICAL OVERVIEW
Pakistan’s cement industry has shown tremendous progress since Independence. In 1947, there
were only four operational cement units in West Pakistan with the total production capacity of
approximately half a million tonnes per annum. Demand during the same period was estimated
at over a million tonnes. The industry experienced gradual growth as five plants were set up in
the 1950’s with a total capacity of 2.8 million tonnes with four more set up in the 1960’s. These
were the Ayub years when the construction industry went through a boom as demand grew
because of an expanding economy and by 1969 the cement industry of Pakistan had 14
operational cement plants with an annual rated capacity of 3.3 million tonnes.
Following this expansionary phase of the cement industry, the Economic Reforms Order of 1972
brought about nationalization of the private sector plants and resulted in a relatively stunted
growth of the industry in the subsequent years. Nationalization merged state owned plants to
form the State Cement Corporation of Pakistan (SCCP) and this “State Cement era” lasted from
1972 to 1992. During these three decades, production increased from 3.5 million tonnes to a
mere 8.4 million tonnes by 1992 and Pakistan’s cement requirements were largely being met
through exports which had started in 1977 and continued till 1995.
Government policy moved towards denationalization in 1977-1988 and emphasis was placed
on housing and construction. To meet demand in the 1980s, the government allowed 7 more
units to be set up by the private sector housing a total capacity of 2.54 million tonnes and 4
plants were set up by the SCCP in the public sector. By the end of this period 24 cement plant
operated in Pakistan. However, there were enormous price differentials between private and
public sector as the SCCP fixed cement prices on the lower side for the public sector companies.
Through to 1995, local capacity was unable to fulfill local demand particularly in the north and
Pakistan continued to import cement in huge quantities to satisfy need and some plants closed
down in between. Prices in the 1990s were, therefore, high as a result of import costs and
shortage of local cement. With projections for accelerated growth in demand in the world and
local economy, five more plants were set up to gratify cement requirements locally. However,
the local demand did not grow as expected during 1995 to 2000 and the cement sector
experienced poor growth rates of 8% per annum. Therefore in post-industry expansion of the
nineties, cement manufacturers had to go through a problematic period of capacity utilization.
Pakistan began exporting in the years 2001-2002 to utilize excess capacity. Reduced deficits and
focus on infrastructure building (by attracting foreign investors during the Musharraf years)
pumped cement demand growth to approximately 20% YoY in the mid-2000’s. Existing players
increased capacity foreseeing further boom in economy in these middle years with total
production capacity resting at 44.7 million tonnes of cement as of the fiscal year 2009-2010.
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5. INDUSTRY ANALYSIS
Market Structure
Although the cement comprises a relatively large number of manufacturing units (24) with a
Herfindahl index of 0.10 that indicates competitiveness tilted towards perfect competition, the
competitive nature of the cement industry is in actuality oligopolistic in terms of market
structure. This is because of the following reasons:
The industry is dominated by a few major players.
This factor is by far the most important one in determining the cement sector’s market
structure. Out of the 24 companies in the cement sector, four of them hold majority market
share and are therefore able to drive industry prices. The chart below shows major industry
players:
CEMENT INDUSTRY MARKET SHARE (FY 2010-11)
Others, 23% Lucky Cement
, 20% Bestway
Attock
Cement
Cement , 6%
, 11%
DG Khan
Pioneer Cement , 15%
Cement , 4%
Lafarge Cement
, 6% Kohat Maple Leaf
Cement , 5% Cement , 10%
A great hold on the market of a few players is also verified from the four and eight-firm
concentration ratios which come out to be 0.55 and 0.77 respectively. Even though the
four-firm concentration ratio depicts medium concentration and implies a relative
oligopoly, the 8-firm concentration ratio of 0.77 shows high concentration and illustrates
the major reason for government concern over the nature of competition for the industry.
The table below shows four and eight-firm concentration ratios for local dispatches and
exports as well as for the overall industry:
Concentration Ratios (FY 2010)
4-Firm 8-Firm
Local Dispatches 0.54 0.77
Exports 0.58 0.80
Overall 0.55 0.77
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6. Interdependence & Collusion
Another factor that provides evidence to the oligopolistic nature of the cement industry in
Pakistan is the interdependence and proof of cartelization between the major players in
determining cost structures, raw material sourcing and most importantly in price setting.
Additionally, the smaller-players are known to indulge in price-wars off and on as they cut
prices and try to sell at discounts before end of each quarter.
The major players in the industry on the other hand have been known to collude in the past
operating as a cartel for over a decade under the umbrella of All Pakistan Cement
Manufacturers Association (APCMA). The sector has been accused of cartelization thrice in
the past and was under probe of the Monopoly Control Authority.
The cartelization issue reached its climax in 2009 when the Competition Commission of
Pakistan issued fines of 7.5% of their last annual turnover amounting to Rs. 6.35 billion on
20 companies that were found guilty of operating as a cartel and raising prices under
mutual agreement. Cement prices rose tremendously immediately prior to the period
before the CCP took action. An example was the increase in cement prices to the extent of
20 percent despite coal prices having gone down in the international market to $124 from
nearly $ 140 in November 2007 to January 2008. Cement prices had soared to as high as Rs.
430 per bag in the later part of 2006. The table below shows some of the companies that
were fined heftily:
Name of Company Fine Imposed (RS)
Pioneer Cement 364,032,300
Attock Cement 374,358,825
D.G.Khan Cement 933,449,700
Dadabhoy Cement 28,393,875
The debate sparked a legal battle between the government and the manufacturers as the
fines were challenged through litigation but at the same time, it worked to break the
collusion. However, post-imposition of fines, as the collusion ended speculation of price
wars broke out amongst all players.
Coupled with the increase in factor prices and the global economic crisis, further strain has
been placed on consumer pockets in terms of cement purchases as manufacturers try to
make up in price what they have lost in volume. Despite a reduction in excise duty from Rs.
700 to Rs. 500 in the budget for FY 2011-2012, cement companies have increased prices to
Rs. 430 per 50kg bag in lieu of maintaining operational profitability as Sales of cement
sector grew by 14 per cent year-on-year to Rs124 billion in fiscal year 2011 compared to
Rs109 billion in the previous year.
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7. Product homogeneity.
Through-out the industry, the products are homogenous with non-existent levels of product
differentiation as the major product for most manufacturers is Ordinary Portland Cement
(90%-94%). Additionally, the other major types of cement product by plants in Pakistan also
include Sulphate Resisting Cement (SRC), Blast Furnace Slag Cement (BFSC), and White
Cement. This implies that competition is based on proximity to raw materials and markets
and tends to limit small-scale manufacturers as far as price-setting is concerned.
Latent barriers to entry.
At the outset, the cement industry does not face any major barriers to entry. However,
manufacturers cost structures have increasingly placed greater pressure on small
manufacturers to bring in cost-efficiencies or else be forced out of the market. Cost
structures are maintained such that they protect the interests of the manufacturers as
opposed to that of consumers.
Moreover, government policies are also in favor of the cement sector with extensive
lobbying being done by the APCMA to maintain such policies.
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8. Growth Trends & Expansion Cycles
The cement industry has grown phenomenally since inception. It is one of the most established
and advanced sector of the Pakistani economy today having been ranked the 5 th largest cement
exporter in the world. It plays a key role in development of physical infrastructure with its
dependent on energy factors such as coal, gas and fuel and generates revenue boosting
economic activities in downstream industries like construction as well as employing well over
150,000 people.
The following chart illustrates capacity utilization in comparison to domestic and export
demand growth trends from the 1990s onwards:
Source: APCMA
The trends show that capacity utilization has steadily increased from the 1990s when excess
capacity had been planned in light of optimistic demand projections which were not realized.
Demand fell over the years during the late 1990s and picked up pace during Musharraf years
with the growing economy and a booming constructions industry as well as demand for exports
particularly in the Afghanistan and Pakistan’s close geographic proximity to it. Following the
economic melt-down in 2007, domestic demand fell again but cement manufacturers,
especially in the Southern region focused on diversifying markets to maintain profitability.
Historically there has been a strong correlation between both domestic consumption, Pakistan
production capacity and growth in real GDP. Demand has been seen to grow as the economy
moves its trajectory upward. Capacity expansion plans have also been put in place where
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9. optimistic future projections have been made as in the 1990s where the industry went through
two such capacity expansion cycles. However, with reference to capacity expansion it has been
observed that expansion is aimed at catering to domestic markets as opposed to export
markets since the greatest capacity expansions have taken place in the Northern region away
from the sea routes of the South.
Capacity Increase in Capacity
The graph above illustrates capacity expansion cycles through the last two decades showing
how expansions have taken place immediately following a positive outlook on industry growth.
Capacity growth along with utilization and growth in total dispatches can be observed below:
Capacity % Change TOTAL % change Utilization Excess Cap.
FY
(Mn. Tonnes) (Mn. Tonnes) (Total) % age (Mn. Tonnes)
1990-91 8.89 0% 7.290 0% 81.99% 1.601
1991-92 8.89 0% 7.712 6% 86.74% 1.179
1992-93 8.89 0% 8.324 8% 93.62% 0.567
1993-94 9.048 2% 8.136 -2% 89.92% 0.912
1994-95 10.173 12% 8.380 3% 82.37% 1.793
1995-96 10.173 0% 9.431 13% 92.70% 0.743
1996-97 12.504 23% 9.650 2% 77.17% 2.855
1997-98 15.528 24% 9.193 -5% 59.20% 6.335
1998-99 16.410 6% 9.621 5% 58.63% 6.790
1999-00 16.379 0% 9.937 3% 60.67% 6.442
2000-01 15.534 -5% 9.933 0% 63.95% 5.600
2001-02 15.723 1% 9.940 0% 63.22% 5.783
2002-03 16.321 4% 11.410 15% 69.91% 4.911
2003-04 16.936 4% 13.663 20% 80.68% 3.272
2004-05 17.909 6% 16.353 20% 91.32% 1.555
2005-06 20.955 17% 18.412 13% 87.87% 2.543
2006-07 30.251 44% 24.248 32% 80.16% 6.003
2007-08 37.157 23% 30.293 25% 81.53% 6.863
2008-09 41.760 12% 31.286 3% 74.92% 10.475
2009-10 44.682 7% 34.195 9% 76.53% 10.487
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10. Factors Affecting Growth
A great number of factors affect the growth of the cement industry in Pakistan which are both
internal to the industry as well as external.
There are 2 main factors that affect demand for cement and are as follows:
Economic Growth
Growth in the GDP of the country contributes enormously to demand for cement. This is
determined through the growth trends discussed earlier which clearly illustrate increasing
demand as the economic variables improve as well as in the table below that shows cement
demand growth relative to real GDP growth for the first half of the last decade:
FY 02 FY 03 FY 04 FY 05 FY 06
Real GDP Growth 3.1% 4.8% 6.4% 8.4% 6.5%
Domestic Demand Growth -1.1% 11.8% 14.2% 18.2% 15%
Cement/GDP Growth -0.36 2.46 2.22 2.16 2.30
This is because economic growth is directly related to the growth of the housing and
construction industry which consumes roughly 40% of cement demand as well as an
indicator of attracting foreign investors which fuels growth in turn.
Government Development Expenditures
Another source of demand for the cement industry is government expenditures which
account for a little less than one third of cement consumption. Higher expenditure allocated
to development projects in essence fuel demand for cement. These development projects
are typically centered round dam building, reconstruction activities in terrorism affected
areas like Waziristan and the Swat Valley as well as rehabilitation activities that focus on
earthquake and flood affected areas in Pakistan.
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11. In addition to the factors mentioned above, the cement industry is also affected by the global
economy as well as Pakistan has forayed in to exports.
Factors that affect the supply side of the cement industry are:
Production factor costs
This is true for any industry. As energy costs surge, factor costs for the cement industry goes
up which consumes a considerable amount of energy resources. The cement industry is
increasingly seeking out cheaper alternatives to coal so as to reduce production costs.
Financial Costs
In the recent past, it has been observed that the cement sector’s profitability is severely
affected by financial costs. Falling interest rates help strengthen the bottom line for the
manufacturers who can then focus on cost-cutting initiatives to have a competitive edge in
the domestic and international markets.
Capacity Utilization
Historically, capacity utilization has been a long-standing issue of concern amongst
suppliers. This is because excess capacity limits manufacturers’ ability to benefit from
economies of scale the benefits of which cannot be transferred to the consumer.
Consequently, suppliers become uncompetitive and consumers have to pay a high price for
inefficient production.
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12. FUTURE OUTLOOK
In the future therefore, it is expected that the cement industry will follow trends of economic
growth within the country. This means that as GDP rises, the demand for cement will also rise.
Additionally, the cement demand will grow in direct proportion to the development
expenditure allocation by the government of Pakistan. However, in order to be competitive the
cement industry requires controlled or regulated costs for the factors of production as well as
lower discount rates so as to reduce debt-equity ratios for the industry which have gone up to
as much as 114%. Additionally, because of the oligopolistic structure of the market and cement
manufacturers past evidence of collusion, control measures need to be put in place to enable
increased competition which will not only bring further efficiencies in production but also seek
to establish a relatively level playing field for smaller players.
CONCLUSION
From the analysis conducted in this report, we can accept both hypotheses established earlier
that is:
Hypotheses 1: The cement industry follows an oligopolistic market structure.
This has been determined through the Herfindahl index and concentration ratios as well as the
from the evidence of cartelization to regulate prices in the industry.
Hypotheses 2: The cement industry will follow economic trends of the country.
This hypotheses is accepted on the basis of evaluating GDP trends, expansion cycles
corresponding to cement demand.
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