INSTITUTE OF BUSINESS AND TECHNOLOGY Financial Analysis of Top Five Major Players of Pakistan Cement Industry Submitted By Mohammad Mustafa (BME/663) Faisal Bin Hasan (BM/15024) Course Code : MKT-606 MBA (Banking and Finance) FACULTY OF MANAGEMENT SCIENCES
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INSTITUTE OF BUSINESS AND TECHNOLOGY
Financial Analysis of Top Five Major Players of Pakistan Cement Industry
Submitted By
Mohammad Mustafa(BME/663)
Faisal Bin Hasan(BM/15024)
Course Code : MKT-606
MBA (Banking and Finance)
FACULTY OF MANAGEMENT SCIENCES
SPRING-2011
CONTENTS
Financial Analysis of Top Five Major Players of Pakistan Cement Industry
Page No
ACKNOWLEDGMENT 04
ABSTRACT 05
CHAPTER 1 INTRODUCTION
1.1 Introduction 07
1.2 Purpose of Study 08
1.3 Research Objectives 09
1.4 Research Methodology 09
CHAPTER 2 LITERATURE REVIEW
2.1 Literature Review 11
CHAPTER 3 CEMENT INDUSTRY OF PAKISTAN
3.1 Growth 22
3.2 Current Scenario 25
3.3 Production 33
3.4 Consumption 36
3.5 Exports 39
3.6 Future prospects 47
CHAPTER 4 GIANTS OF PAKISTAN CEMENT INDUSTRY
4.1 Lucky Cement 53
4.2 Attock Cement 55
4.3 D. G. Khan Cement 57
4.4 Maple Leaf Cement 59
4.5 Lefrage Cement 60
CHAPTER 5 FINANCIAL ANALYSIS OF CEMENT INDUSTRY
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5.1 Profit and Loss Statement Analysis 62
5.2 Balance Sheet Analysis 64
5.3 Cash Flow Statements 68
5.4 Statement of changes in equity 68
CHAPTER 6 SWOT ANALYSIS OF CEMENT INDUSTRY
6.1 Strength 68
6.2 Weakness 71
6.3 Opportunities 72
6.4 Threats 72
CHAPTER 7 CONCLUSION AND RECOMENDATIONS
7.1 Conclusion 74
7.2 Recommendations 75
REFERENCES 77
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Financial Analysis of Top Five Major Players of Pakistan Cement Industry
ACKNOWLEDGEMENT
First of all we would like to thank Almighty Allah who enabled us potency and courage
to successfully research and pen this project, to achieve our target and complete this
report up to our ultimate level.
We would like to extend our special thanks to DR. NOOR MEMON, who conducted our
Project course and continuously guided and supported us during our project and
enabled us the opportunity of practically performing all that we had studied during the
semester.
We are very thankful to him for his support throughout this project for proof reading,
formulating and information gathering of this report. We are also grateful to him for the
valuable time he has given us for this report in particular and for the over all learning of
finance and research at large.
We would also like to thank the endurance of our parents and family members for
bearing up with us throughout this endeavor both time and money wise.
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Financial Analysis of Top Five Major Players of Pakistan Cement Industry
INSTITUTE OF BUSINESS AND
TECHNOLOGY
ABSTRACT SUBMITTED BY: Mohammad Mustafa
Faisal Bin Hasan
DISCIPLINE: MBA (Banking and Finance)
TITLE OF PROJECT REPORT: Financial Analysis of Top Five Major
Players of Pakistan Cement Industry
MONTH OF SUBMISSION: April 2011
NAME OF PROJECT SUPERVISOR: Dr. Noor Ahmed Memon
Abstract
Cement is one of the major industry of Pakistan’s economy. Pakistan is rich in cement
raw material. Currently many cement plants are operating in private sector. Pakistan
Cement industry has huge potential for export of cement to neighboring countries like
India, United Arab Emirates, Afghanistan, Iraq & Russian States. There has been a
robust growth of cement demand seen both in domestic and export market.
Construction sector exhibited a strong 15.3% growth in FY-10 compared with a
contraction of 11.2% in FY-09. This remarkable performance was driven mainly by a
decline in building material prices, which in turn, was caused by reduction of duty on
cement sales and decline in global prices of coal, iron, and wood. Anecdotal evidence
suggests that most of the construction growth was led by the private sector.
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Total growth in construction industry is indeed a welcome development giving the
existing backlog of housing units in the country and the industry’s backward and forward
linkages with other industries. It is estimated that the country has a backlog of around 8
million housing units which is increasing every year due to inadequate spending on
housing sector.
This report is based on introduction and Financial Analysis of Top Five Major Players of
Pakistan Cement Industry, in this report we are considering five major cement
companies i.e. Lucky Cement, Attock Cement, D.G. Khan Cement, Maple Leaf Cement,
Lefrage Cement, which are cement Manufacturing Companies and they export to many
countries of the world.
This report focuses on evaluating the industry’s service process, resources, financial
statements, current market scenario and other aspects. The report helps us to know the
current position of Cement Industry, and its strength, weakness, opportunities and
threats, by their customer analysis, their market strategy, implementation and future
prospects.
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1. INTRODUCTION
1.1 Introduction
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 Khan 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 nationalized, 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 almost 30. The cement industry in Pakistan has come a long way since
independence when country had less than half a million tones per annum production
capacity. By now it has exceeded 10 million tones per annum as a result of
establishment of new manufacturing facilities and expansion by existing units.
Privatization and effective price control in 1991-92 ushered in a new era in which the
industry has reached a level where surplus production after meeting local demand is
expected yearly. The cement industry is considered a highly important segment of
industrial sector that plays a pivotal role in the socio-economic development. Though
the cement industry in Pakistan has witnessed its lows and highs in recent past, it has
recovered during the last couple of years and is optimistic once again. There are total
number of units are around 30, from which 4 units are in the public sector while the
remaining 25 units are owned by the private sector. Two of the four units in the public
sector had to close down their operations due to stiff competition and heavy cost of
production. The cement plants are located in every province of Pakistan.
The province-wise distribution of cement plants is as under:
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With regards to the competition in export markets, we have observed following
behaviors of cement industry in Pakistan. Cement exports started in FY02 to
Afghanistan that is still a major market Iraqi market can become a potential target after
peace is restored India and Iran are the major competitors for Pakistan in the Middle
Eastern region Upcoming capacity expansions in Iran and other GCC countries will
create tough competition for Pakistan. Export prices are presently touching USD 75/ton
in the exports market, however they are likely to come down as new capacities comes
online However, the cost and exports may be affected due to weakness of the US dollar
causing coal, electricity charges and freight prices, comprising 65 to 70 percent of the
cost. The PSDP allocation has been cut by Rs. 75 billion and feared further cuts would
curtail cement demand. Major capacities of countries like India and Iran are expected to
come online by FY11 and onwards which are likely to convert these countries from
dependent importers to potential exporters.
The export reached to $ 500 million increase during 2008. Data for the first quarter of
FY08 show that Afghanistan was Pakistan’s largest cement export market. The
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prospects for cement exports seem bright in the medium term due to rising domestic as
well as regional cement demand. Pakistan also achieved improved access to India after
the complete removal of the 12.5 percent custom duty on Portland cement imports in
this country from January 2007, showing improved export opportunities for Pakistan.
India is planning to import more cement from Pakistan to stabilize prices in the market
and the government wants a balance in demand and supply of cement in the current
year.
In June 2010, sales of cement in Pakistan were counted at 2.09 million t. By July 2010,
however, a reduction of 16% in cement sales was recorded, with the figure standing at
just 1.75 million t, according to data acquired by the APMCA. This does not go against
previous trends, as cement sales typically decrease during the monsoon season in
Pakistan, which occurs in July. This trend is further supported by the sales figures of
July 2009, where sales decreased by 12%. In 2010, however, the decrease in cement
sales has been more dramatic and can be explained by the increased rainfall and
resultant floods that affected the region at the end of July.
Export figures also showed a decline, with a monthly reduction of 15% and a reduction
of 31% y/y. There are two principal reasons for this decline. As far as the monthly
figures are concerned, this was a result of the lack of an inland freight subsidy. The
reduction in yearly figures was as a result of higher overall prices in the sector.
There was no recovery in August 2010, however, as a direct result of the flooding, and
also due to the slowdown in the construction industry that usually occurs during the
month of Ramadan. The sales recovered during the beginning of the 2011/12
financial year; this is due to the fact that extensive rebuilding will be necessary in
regions that have suffered severe damage during the recent floods.
Prior to 2011, however, further decreases in cement dispatches occurred . In August
2010 for example, cement dispatches reduced by between 20 – 30%. As a knock-on
effect of this decline, the sale price of cement during September and October is
expected to see a reduction of about Rs.10 – 20 per bag. Prices should return to their
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original figures once rebuilding starts during the coming months, while the cement sales
figures should be restored by the latter half of 2011.
Dispatch figures are expected to gradually recover, with some slight improvements,
although dispatches will remain low in comparison to previous years’ figures.
Export Outlook:
There was sluggishness in the growth of cement exports in Pakistan during the first
nine months of FY09/10, which can be explained by examining the slowdown in
construction in the GCC. However, there was significant growth in the cement export
figures to other African nations, and so many Pakistani cement manufacturing
companies are actively targeting this market. However, this has encouraged local
cement manufacturers in Africa to try to hamper sales of Pakistani cement in their
countries.
A decline in prices internationally has also contributed to the export slowdown, as has
an increase in inland charges, which has discouraged cement manufacturers in
northern Pakistan from exporting their commodities. An inland freight subsidy has been
supplied by the Pakistani government, but its effects have not yet been seen.
The export of cement from Pakistan increased 52% in initial nine months of 2009 to
reach 7.9 million tonnes. According to All Pakistan Cement Manufacturers Association
(APCMA), local cement dispatches in first nine months fell by 17 percent to stand at
13.9 million tonnes, though of pace of growth has slowed down in recent months.
The consumption of cement in local market depends a lot on climatic conditions
therefore, on monthly basis local dispatches went up to 1.7 million tonnes as winter
season has worn off and local projects have gradually started to gain momentum.
Export has also increased by 10 percent on monthly basis to 1,032,000 in March. Based
on estimates, exports have crossed the 1 million mark first time ever.
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On the export front, depreciation of rupee has rendered Pakistani cement as a highly
attractive option. The north has primarily contributed to the impressive increase in
exports.
The exports primarily increased due the demand coming from Afghanistan that
accounts for 28 percent of the exports (36 percent in FY08). “This is because the
increasing exports have primarily been directed towards the cement thirsty UAE, the
elaborate construction projects of which have yet to take a hit from the ominous
economic slowdown,” an analyst said.
Demand from Middle East and African countries continued to drive exports, though
there is a risk that global economic slump may affect future export orders. As a result,
share of exports in total sales rised to 36 percent in the first nine months of FY09 as
against 24 percent in the corresponding period of last year.
Exports are expected to register a slow down in growth, as the global economic hold up
deepens further reducing demand for housing and construction activities. The demand
and supply gap in the international market is expected to narrow down further as other
countries gear up with more capacity, thus reducing export demand, analysts said.
“Pressure is being exerted on local demand, primarily due to macro-economic
slowdown, high interest rates, sky-high cement prices . The local prices are currently
hovering around an average retail price of Rs 355 per 50 kg bag (Rs 7,100 per tonnes)
and a retention price of Rs 255 per 50 kg bag (Rs 5,109 per tonnes).
Studies have shown that cement demand is highly correlated with the growth rate of
GDP. Recently, the ministry of finance has further revised the GDP growth target
downward to 3.4 percent from 3.5 percent, which will further erode cement demand.
Pakistan cement factories continue to make significant progress in cement exports. Now
Pakistan is ranked 5th in the world’s cement exports after a huge increase of 47 percent
in exports during last fiscal year. According to the Global cement report, China
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maintained first position with 26 million tonnes in exports, while Japan got second
position by exporting 12.6 million tonnes of cement.
According to figures provided by the All Pakistan Cement Manufacturers Association,
the first seven months of this fiscal have seen both domestic and export sales suffering,
with the former down 9.63% and the latter declining by 17.03%
Total sales for the July 2010 – January 2011 period reached just 17.2 million t, down
12.01% y/y. In the July 2009 – January 2010 period, domestic sales had increased
14.7%, contributing to an overall sales growth of 9.3% as exports fell.
Pakistan has a massive installed capacity of over 41 million t, divided unevenly between
the north (which has by far the greater part at >30 million t capacity) and south of the
country. A further 2.68 million t will be added this fiscal, as Fauji Cement’s new plant
becomes operational. Domestic demand in Pakistan is comparatively low, with the
majority of capacity intended for export, on which the industry is highly reliant. However,
capacity utilization has been falling since its peak of 90% in 2004/05. In 2009/10
capacity utilization stood at 76.53% and that figure has decreased to 71.55% in the first
seven months of 2009/10.
Companies exporting cement from the land-locked north of the country via sea have
suffered the loss of many export orders due to the debilitating transportation charges
from their plants to the ports.
At one time, the rate of growth of export sales was phenomenal, registering a 140%
increase in 2007/08 and a 39% increase the following fiscal, at which point export sales
stood at 10.75 million t. The 2009/10 fiscal saw a small decline to 10.65 million t.
Exports in the first seven months of this fiscal have reached 5.19 million t, a 17.03%
decline y/y.
3.6 Future Prospects
The cement demand would increase in future due to Government policies as the
Pakistan People’s Party’s (PPP’s) slogan has always been ‘roti, kapra aur makan’
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(bread, clothing and housing). In this regard a statement of the PPP Government
confirmed that it would encourage industries and construct small dams. Pakistan's
economy, PACRA said grew impressively during last five years with an average GDP
growth rate of around 7%. Cement industry has a positive correlation with the GDP
growth rate. The major domestic demand drivers are public sector development
programs (infrastructure), real estate and industrial construction.
But on other hand there are many factors, which can create problems in Pakistan
cement industry. According to the experts of Pakistan Credit Rating Agency (PACRA)
the cement sector is currently facing severe challenges which originate from a wide
range of socio-economic risks including contracting economic activities, and high input
costs. These negative developments, along with the prevailing credit crunch and rising
interest rates, have further constrained the industry's prospects.
The encouraging economic environment not only energised the local demand but also
provided momentum for capacity expansion. Resultantly, the industry added significant
capacity recently, while several new production lines are scheduled to commence
operations shortly. During this period, the cement manufacturers also established export
operations by catering to the growing demand of regional economies. This, while
stabilizing the local cement prices, had a positive impact on capacity utilization and
margins. Although the local demand reduced significantly in the first quarter of FY 09
(around 15% decline), strong growth in exports has provided support to the industry in
the form of largely sustained capacity utilization and price stability. However, given the
global export demand is expected to come down.
This would negatively impact the margins and put pressure on local prices that could
lead to a price war among producers. The looming supply overhang scenario in the
sector could potentially worsen the situation. Profitability of the sector has come under
pressure due to high energy cost (comprising around 50% of total raw material costs)
and increasing financial expenses.
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Keeping these developments in view, the outlook on the sector is negative which
implies that PACRA perceives downward pressure on the ratings within the industry,
especially for high leveraged entities. PACRA, as part of its on going inspection, is
monitoring all developments very closely, and may take a client specific rating action
wherever it is deemed feasable. However, the cost and exports may be affected due to
weakness of the US dollar causing coal, electricity charges and freight prices,
comprising 65 to 70 percent of the cost. The PSDP allocation has been cut by Rs 75
billion and feared further cuts would curtail cement demand.
Future Course of action for Cement Industry and Government:
Related governmental regulations:
The policy of the Government is to keep a balance between rapid economic
development, on the one hand, and social justice and consumer’s protection, on the
other. There is a traditional conflict between these two aims. It is, therefore, necessary
to regulate trade, commerce or industry in the interest of free competition therein. The
Ordinance was promulgated to provide for measures against un-due concentration of
economic power, growth of un-reasonable monopoly power and un-reasonably
restrictive trade practices.
Thus cement industry too is monitored and answerable to rules and regulations
developed by the monopoly control authority of Pakistan. The government is
considering allowing further concessions and additional incentives for cement export,
with a view to increase overall export volume. These measures will immensely help in
promoting and protecting high investments made in cement sector in recent years. In
the wake of its huge surplus production as a result of massive capacity expansion
undertaken it rather seems imperative for Pakistani cement industry, on one hand, to
sustain existing export markets and, on the other, explore new markets.
1. Govt. Should improve law & order to support export
2. Ban likely to be placed on cement import
3. No changes in cement import and export policy.
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4. Crisis: Country faces energy crisis, Rising prices hurting industry.
5. Short-term measures:
Duty drawback
Port charges
6. Medium term measures:
Abolishing of / reduction in central excise duty
7. Long term measures:
Infrastructure at port.Pakistan could save about $70 million on the import
of furnace oil per annum. This would result in a low price per bag of
cement and would ultimately encourage domestic demand for cement.A
comparative study regarding taxes on cement indicates that as against
Pakistan where the taxes on cement are 37 per cent, it is nil in Iran, 7 per
cent in Thailand, 10 per cent in Egypt, 10 per cent in Philippines, 10 per
cent in Indonesia and 18 per cent in India.
Cement manufacturing in Pakistan was never as optimistic as it has become in the
preceding couple of years. Though an oligopoly, there exists enormous competition
between members of the lobby. Critical success factors of the industry have commonly
become utilization of idle production capacity, additions to which have started sending
hostile signals to market participants. Cement manufacturers have undertaken counter
offensive strategies by introducing capacity enhancements of their own to capture extra
market share and achieve economies of scale from production activities.
The cement industry tends to rely on growth in agriculture income, along with
government spending on infrastructure. However in 2011, there will be no demand from
these two important sectors. On the contrary, further fallout from the flooding will result
in large demands on the government finances, while the majority of farmers in Pakistan
will have limited funds due to the extensive destruction of crops and the resultant
decrease in income.
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As the floods occurred immediately before the month of Ramadan, the cement
manufacturers within Pakistan had already built up a surplus in imports so as to have
sufficient stocks built up at the ports within the country. Although the floods decimated
the country’s communications, the rebuilding which began in December 2009 helped to
settle the issue to an extent.
Right now, the future prospects of the Pakistan cement industry are good. A manifold
increase in cement exports to African nations and the Middle East should occur.
Additionally, there is massive reconstruction taking place in both Iraq and Afghanistan,
which should rely extensively on cement imports from Pakistan.
It is possible that the cement industry in Pakistan may undergo widespread growth in
2014, as a result of projected regional and local demand. In the last ten years, cement
demand has risen to 33.2 million tonnes, an increase of 235%. Production, however,
has increased to 44.8 million t, leaving a surplus of 11.6 million tonnes.
While extensive damage has been caused by the last flooding, there is a definite need
for planned and directed investment in infrastructure, transport and construction within
Pakistan, especially if the nation is to achieve its ambition of a gross GDP growth of 6%
within the coming five years. It is essential for the future development of industry in
Pakistan that trade corridors, highways and dams be provided.
The overall future of Pakistan Cement is bright b/c after Earth Quake & flooding there is
a huge demand for constructing new houses. The population is increasing rapidly
creating more demand for houses & cement. Moreover people are moving from villages
to cities in search for jobs & better conditions creating more demand for housing. The
government should decrease duties on the sector so that its price becomes low & it is
consumed locally more beneficially. There is also a need to find better export avenues
other than the ones they already have. Power shortage also affects all industries
including cement sector. There is a need to develop more cheap electricity projects to
fulfill the demand of electricity by the industrial sector.
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4. GIANTS OF PAKISTAN CEMENT INDUSTRY
4.1 Lucky Cement
Sponsored by well known “Yunus Brothers Group” – one of the largest export houses of
Pakistan, Lucky Cement Limited currently has the capacity of producing 25,000 tons per
day of dry process Cement.
Lucky Cement Limited is Pakistan’s largest cement manufacturing company with the
production capacity of 7.75 million tons per annum. Lucky Cement Limited is also
Pakistan’s first and largest exporter of loose cement and is the only cement
manufacturer to have loading and storage terminal at Karachi Port. Other exclusive
attributes that allow Lucky Cement to stand ahead of its competitors is the
transportation fleet of 77 bulkers as well as 2 ship loaders.
Lucky Cement came into existence in 1996 with a daily production capacity of 4,200
tons per 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: 12,000 tons per day), it has the tendency to become
the hub of cement production in Asia.
We envision being the leader of the cement industry by identifying and capitalizing on
new market opportunities, meeting expectations of the stakeholders, contributing
towards industrial progress and sustainable future, while being responsible corporate
citizens.
Our mission is to expand our business network by forming strategic alliances in the
global market.
We endeavor to equip our business with the latest technology to produce quality cement
while conserving energy & recuding co2 emission to reinforce eco-friendly business
practices; thus meeting international standards.
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We employ the latest production techniques and the finest quality of raw materials to
ensure optimum efficiency at all stages of production.
The efficiency and the effectiveness of our production method(s) help us compete in the
market and meet the growing demands of our customers.
YB Group has diversified interests in the fields of textile, cement and energy sectors.
The Group was established in 1962 and today has a strong and sound standing position
in Pakistan and around the globe. It owns the largest cement manufacturing facility and
the largest yarn manufacturing unit in the country. It has to its credit the honor of being
Pakistan's largest exporter. YB Group is driven by the needs of its customers,
shareholders, local communities and society at large.
The Pakistan Cement Industry concluded the financial year ended June 30, 2010 with a
decent growth of 9.4% and achieved highest ever total sales volume of 34.22 million
tons against the last year's sales volume of 31.28 million tons. The industry witnessed a
handsome growth of 14.6% in local sales volume and achieved the highest ever local
sales of 23.53 million tons in the history of the Country in spite of depressed public
sector development project spending by the Government. The recovery in local sales
was mainly achieved on the back of private sector, coupled with recovery of rural
economy because of better agriculture support prices. On contrary, the industry
witnessed a breakeven in export sales and exported 10.69 million tons of cement and
clinker as compared to 10.75 million tons exported last year.
By the grace of Almighty Allah, your Company managed the highest ever total sales
volume of 6.63 million tons during this financial year and witnessed an overall
handsome growth of 12.3% over the last year total sales volume of 5.90 million tons.
Out of the total sales, the local sales volume witnessed a robust growth of 26.3% with
3.12 million tons over last year's volume of 2.47 million tons whereas the export sales
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volume witnessed a meager growth of 2.2% with sales volume of 3.51 million tons over
last year's volume of 3.43 million tons.
Your Company is in continuous process of improving operational and cost efficiencies
and has made huge investment in recent years. Alhamdullilah, during this financial year,
your Company has achieved another milestone by successful operation of the Waste
Heat Recovery Project of Karachi Plant which has replaced almost 23% power
generation related fuel cost of the Company. With the increase in prices of oil and gas,
the benefit of cheap electricity generation from Waste Heat Recovery Project without
any fuel consumption will enhance the cost competitive strength of your Company.
4.2 Attock Cement
Attock Cement Pakistan Limited (ACPL) is a public limited company, listed on the
Karachi Stock Exchange since June 2002. Main business of the company is
manufacturing and sales of cement. ACPL is part of the Pharaon Group, which in
addition to investment in cement industry has diversified stakes in Pakistan mainly in
the oil and gas sector, power and real estate sector.
ACPL is a member of Pharaon Group of Companies operating in Pakistan. ACPL's
project was conceived in 1981. The project is a Pak-Saudi venture and has involved an
initial capital outlay of around Rs.1.5 billion with a foreign exchange component of
around US$ 45 million. ACPL's manufacturing plant is located in Tehsil Hub, District
Lasbela, Balauchistan, at a distance of about 45 kilometers north west of Karachi. ACPL
has attained ISO 9001:2000 and ISO 14000 certifications from Lloyds Register Quality
Assurance (LRQA) in 2002 and 2006. ACPL is making substantial contribution to the
country's economy and deposited over Rs.2,646 million (US$ 31.5 million) in the form of
Excise Duty , Sales Tax, Royalty and Income Tax during the year 2008-2009.
The Plant's original capacity was 2000 TPD of Clinker and it was the first plant in the
country to be based on the latest SUSPENSION, PRE-HEATER/PRE-CALCINATION,
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dry process technology which results in substantial savings in fuel and energy costs
besides balanced plant operations.
With continuous growth in cement demand both in local and regional markets, the
company put up another line of 3,300 TPD of clinker in 2006-2007 at a total investment
of US $ 61 million. With this additional line the total clinker capacity of the company has
reached 1,710,000 MT of clinker per annum.
“The cement manufactured and being marketed under the “FALCON” brand is of the
highest standard and truly the market leader.”.
To be the leading organization, continuously providing high quality cement, excelling in
every aspects of it's business and to remain the market leader in the cement industry.
To be a premier and reputable cement manufacturing company dedicated to become
industry leader by producing quality products, providing excellent services, enhancing
customer satisfaction and maximizing shareholder's value through professionalism and
dedicated team work.
We are committed to produce high quality, FALCON CEMENT which not only
meets but exceeds the international quality standards.
We aim to maintain leadership of our Cement Industry providing premium quality
products and excellent services to our consumers.
We work as a team of dedicated professionals, who achieve excellence through
training, development and continuous technological up-gradation.
We aim to implement and continually improve the effectiveness of our Quality
Management System.
We provide safe and conducive work environment to our staff by ensuring
stringent standards of safety and health.
We make a contribution towards the uplift of our environment and inhabitants of
the surroundings.
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The Company continued to strongly support the uplift of the local community, as they
are an integral part of it. Basic education facilities, medical treatment and availability of
clean drinking water to the masses are the few top priorities of the Company. Presently,
we are successfully running a school in Sakran where children of workers and nearby
villages are getting free education. Moreover, with the cooperation of local
administration, we are planning to upgrade the existing school in Hub, having all
required facilities. Sensing the dire need for availability of medical facilities for the
deserving, the Company regularly arranges free medical camps for the locality where
treatment and medication is provided free of cost. During the year three medical camps
were arranged where nearby villagers and Company workers' families were given free
treatment. Additionally, the Company embarked upon and awareness programme on
Hepatitis ‘B' & ‘C' for the local residents of nearby Goths. The Company provides
transport in emergency and financial help to the downtrodden nearby villagers on a
regular basis.
The Company currently operates a Primary level school that imparts education to
children of both plant employees and also those from neighbouring villages.
The Company has also signed a Memorandum of Understanding with The Citizen
Foundation (TCF) a non-profit organization for the construction of TCF primary and
secondary school located near to factory premises, which is close proximity to the
surrounding villages. The total cost of this project would be around Rs. 40 million. This
school would comprise of 2 units primary portion and 2 units secondary portion. The
structure of the primary school building has been completed and the progress of the
project is on track as per the schedule. The school would commence its academic
activities from April 2010. With the completion of this school at-least 1000 children of
this area will get quality education free of cost.
4.3 D. G. Khan Cement
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
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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.
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 million tonnes 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.
Furthermore, the Group is also setting up a new cement production line of 6,700 TPD
clinker near Kalar Kahar, Distt. 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 whereby production may be adjusted according to market conditions. The
project will be equipped with two vertical cement grinding mills. The cement grinding
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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.
For continuous and smooth operations of the plant uninterrupted power supply is very
crucial. The company has its own power generation plant along with WAPDA supply.
The installed generation capacity is 23.84 MW.
DG Khan Cement Co. Ltd., production processes are environment friendly and comply
with the World Bank’s environmental standards. It has been certified for “Environment
Management System” ISO 14001 by Quality Assurance Services, Australia. The
company was also certified for ISO-9002 (Quality Management System) in 1998. By
achieving this landmark, DG Khan Cement became the first and only cement factory in
Pakistan certified for both ISO 9002 & ISO 14001.
4.4 Maple Leaf Cement
At the time of privatization in 1992, the capacity of Maple Leaf to produce Ordinary
Portland Cement (OPC) was 1000 tones per day (tpd). A second plant of 4000 tpd was
commissioned in 1998 and a third plant of 6700 tpd came into production in 2006. It
increased 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 with 80% of market
share.
The plants of 4000 tpd, 6700 tpd and of White Cement are state of the art and have
been supplied by FLSmidth in Denmark. In order to ensure the highest efficiency and
process control the plants comprise of equipment with the latest design and technology.
To maintain the highest quality standards a laboratory has also been set up at site for
the testing of raw materials and cement. All Maple Leaf plants comply with National
Environment Control standards.
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In order to remain competitive in the market the management at Maple Leaf
continuously re evaluates its business strategies. With the increase of furnace oil prices
the company adopted coal as a more cost efficient and environmentally friendly fuel for
kiln firing. Today the management believes that the future lies in exploring the
possibilities of alternative and cheaper fuels such as waste firing. This would further
reduce production costs whilst promoting a culture of environmental awareness, health
and safety.
Maple Leaf Cement is committed to run an efficient and profitable business and
therefore aims to employs cutting edge technology to ensure energy efficiency and the
optimum use of natural resources. The visionary and experienced management drives
the company to set goals that position Maple Leaf ahead of the competition and as a
key player in the cement industry.
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.
4.5 Lafarge Cement
Lafarge Pakistan Cement (LP) is a part of Lafarge, world leader of construction
materials. The state-of-the-art plant commenced Commercial Operations in December
2006 with an annual cement production capacity of 2.5m tons, thus becoming the
largest production line in Pakistan.
The plant is located at Kalar Kahar, District Chakwal in the province of Punjab, an area
rich in lime stone reserves. The quality of lime stone in this area is considered to be the
best in the region. In addition to Ordinary Portland Cement (OPC) the plant can also
produce Sulphate Resistant Cement (SRC) with the packaging options of 50 kg bags,
1.5 tons, 2 tons jumbo bags and bulk carriers. The advanced plant laboratory is the
most sophisticated in the industry and ensures consistent high quality of cement.
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LP is proud of its product PAKCEM which is the leader on all quality scales. PAKCEM is
the first cement in Pakistan to comply with European Standards (EN 197) and Indian
Standards (IS 12269) also far exceeding requirements of Pakistani Standard (PS 232).
LP’s aim of being at the forefront in creating foundations for a prosperous tomorrow is
backed by the Company’s philosophy of providing outstanding value to its customers, a
safe and stimulating work environment for its employees, superior returns for its
shareholders and special focus on social responsibility and environmental protection.
Strive to exceed the expectations of our stakeholders through sustainable growth and
high quality performance.
We are committed to providing outstanding value to our customers, a safe and
stimulating work environment for our employees and superior returns for our
shareholders.
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5. FINANCIAL ANALYSIS OF CEMENT INDUSTRY TOP PLAYERS
5.1 Profit and Loss Statement Analysis
Profit & Loss Ratios:
Profitability Ratios:
1) Gross profit margin:
Gross profit margin is computed by dividing earnings before interest and taxes by total
operating revenue and thus they express profit as a percentage of operating revenue.
Gross Profit Margin = Gross profit / sales
2008 2009 2010
1- D. G. Khan Cement = 32% 16% 17%
2- Lucky Cement = 26% 37% 33%
3- Attock Cement = 22% 32% 26%
4- Maple Leaf Cement = 17% 32% 22%
5- Lafarge Cement = 13% 12% 12%
2) Net Profit Margin:
Net profit margin is computed by dividing net income by total operating revenue and
thus they express profits as a percentage of operating revenue.
Net Profit Margin = Net income / Sales
2008 2009 2010
1- D. G. Khan Cement = -0.43% 2.91% 1.43%
2- Lucky Cement = 15.79% 17.46% 12.80%
3- Attock Cement = 8.70% 17.54% 13.26%
4- Maple Leaf Cement = -8.65% -6.45% -18.95%
5- Lafarge Cement = -16.70% -15.73% -13.78%
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Net Profit Margin Illustrated in Chart:
3) Operating Profit Margin:
Operating Profit Margin = EBIT / SALES
2008 2009 2010
1- D. G. Khan Cement = 12.11% 18.76% 13.89%
2- Lucky Cement = 18.14% 27.41% 17.31%
3- Attock Cement = 16.57% 24.78% 19.12%
4- Maple Leaf Cement = 5.74% 16.28% 3.74%
5- Lafarge Cement = 0.90% -0.29% 0.90%
Interest Coverage Ratio:
One of the most traditional of the coverage ratios is the interest coverage ratio, or times
interest earned. This ratio is simply the ratio of earning before interest and taxes for a
particular reporting period to the amount of interest charges for the period to the amount
of interest charges for the period.
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Interest Coverage = Earnings before interest and taxes (EBIT) / Interest expense
2008 2009 2010
1- D. G. Khan Cement = -0.14 0.30 0.19
2- Lucky Cement = 21.13 3.72 4.19
3- Attock Cement = 2.83 12.47 17.88
4- Maple Leaf Cement = -0.37 -0.29 -1.25
5- Lafarge Cement = -0.83 -1.04 -0.94
Earning per Share:
Earning per share is calculated Profit after Tax divided by No. of Ordinary shares, it
shows current rate of per share of the company.
Earning per Share = Profit after taxes / No. of ordinary Shares
2008 2009 2010 1- D. G. Khan Cement = -.021 1.96 0.72
2- Lucky Cement = 9.84 14.21 9.70
3- Attock Cement = 6.03 20.69 11.74
4- Maple Leaf Cement = -1.96 -2.78 -6.94
5- Lafarge Cement = -1.01 -0.97 -0.72
Detailed Profit & Loss Statements of major companies provided in Annexure A
5.2 Balance Sheet Analysis
Balance Sheet Ratios:
Liquidity Ratios:
1) Current ratio:
The most widely used measure of short-term debt paying ability is the current ratio. This
ratio is computed by dividing total current assets by total current liabilities. The higher
the current ratio, the more liquid company appears to be.
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Current Ratio = Current assets / current liabilities
2008 2009 2010 1- D. G. Khan Cement = 1.59 0.84 1.19
2- Lucky Cement = 1.06 1.30 0.71
3- Attock Cement = 1.51 2.43 2.62
4- Maple Leaf Cement = 0.81 0.52 0.54
5- Lafarge Cement = 0.73 0.31 0.26
2) Quick Ratio :
Inventory and pre-paid expenses are the least liquid of the current assets. Therefore
same short term creditors prefer the quick ratio to the current ratio as a measure of
short term solvency.
The quick ratio compares only the most liquid current assets – called Quick assets with
current liabilities quick assets are those which can be converted most quickly into cash
the higher the current ratio, the more liquid company appears to be. Quick ratio should
be greater than 1.
Quick Ratio = Current asset – inventory / current liabilities
2008 2009 2010 1- D. G. Khan Cement = 1.56 0.78 1.12
2- Lucky Cement = 0.99 0.73 0.65
3- Attock Cement = 1.09 1.89 2.28
4- Maple Leaf Cement = 0.75 0.46 0.48
5- Lafarge Cement = 0.55 0.21 0.19
Debt Ratios:
1) Debt to Total Asset Ratio:
It highlights the relative importance of debt financing to the firm by showing the
percentage of the firm’s assets that are supported by debt financing. It is derived by
dividing a firm’s total debt by its total assets
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Debt to Total Asset = total debt / total asset
2008 2009 2010 1- D. G. Khan Cement = 0.42 0.51 0.44
2- Lucky Cement = 0.46 0.39 0.34
3- Attock Cement = 0.40 0.31 0.24
4- Maple Leaf Cement = 0.68 0.74 0.80
5- Lafarge Cement = 0.50 0.50 0.55
2) Debt to Equity :
The debt equity ratio is the value of total debt divided by the book value of equity which
implies how much time total liabilities are greater than the share holder equity.
So this ratio should be small because if the large numbers of shares are outstanding
even than there is no obligation on the company to pay the dividends. But in the case of
debt the interest payment is must therefore debt equity ratio should be a small number
as far as the management is concerned.
Debt to Equity = total debt / equity2008 2009 2010
1- D. G. Khan Cement = 0.73 1.04 0.77
2- Lucky Cement = 0.84 0.65 0.53
3- Attock Cement = 0.66 0.46 0.31
4- Maple Leaf Cement = 2.13 2.82 5.07
5- Lafarge Cement = 0.99 1.02 1.21
Asset Activity Ratios:
1) Inventory Turnover Ratio:
Measures how many times the inventory has been turned over (sold) during the year;
provides insight into liquidity of inventory and tendency to overstock.
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Inventory Turnover Ratio = Cost of Goods Sold / Inventory
2008 2009 2010
1- D. G. Khan Cement = 23.62 13.73 13.09
2- Lucky Cement = 17.76 13.80 27.15
3- Attock Cement = 9.49 9.45 15.59
4- Maple Leaf Cement = 14.96 15.82 21.18
5- Lafarge Cement = 6.82 9.87 9.64
2) Total Asset Turnover :
The relationship of net sales to total assets is known as the total asset turnover, or
capital turnover ratio. Measures relative efficiency of total assets to generate sales
Total Asset Turnover = Sales/ total asset
2008 2009 2010
1- D. G. Khan Cement = 0.24 0.42 0.35
2- Lucky Cement = 0.61 0.81 0.64
3- Attock Cement = 0.85 1.22 1.09
4- Maple Leaf Cement = 0.30 0.59 0.52
5- Lafarge Cement = 0.34 0.41 0.35
Total Asset Turnover Illustrated in Chart:
Detailed Balance Sheets of major companies provided in Annexure B5.3 Cash Flow Statement Analysis
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With regards to cash flow statements Attock Cement has the best cash flow currently (FY!0) with cash flow of Rs.427109 followed by Lucky Cement Rs.333629 & Maple Leaf Rs.73625.
Detailed Cash Flow Statements of major companies provided in Annexure C.
5.4 Statement of Changes in Equity
When we went through the Statement of Changes in Equity of top companies we found
that D.G Khan Cement has the highest equity currently (FY!0) with over 26.5 m followed
by Lucky Cement 25 m & Lafarge Cement 8.8 m.
Detailed Statements of Changes in Equity of major companies provided in Annexure D.
6. SWOT ANALYSIS OF CEMENT INDUSTRY
6.1 Strengths
1- Availability of Raw Material.
2- Imported Machinery and plants in most of companies, which provide better
quality to over all process.
3- Pakistan already established its position as an exporter of cement and clinker in
the region,.
4- Availability of foreign investment and loans has also played an important role in
softening the demand for bank credit. The moderation in fixed investment
demand in cement, construction and textile is more of a reflection of the fact that
these industries had already expanded their capacities in recent years and
floatation of debt instruments (e.g., chemical, cement, real estate and ship yard)
in the domestic market cement, real estate and ship yard) in the domestic
market.
5- The compressive strength is a very important factor of cement. The Portland
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cement achieves its maximum strength in 28 days. The Pakistan standard PSS
232-1883 (R) & British Standard BS 12: 1978 provides for 28 days strength of
5000 Psi and 5950 Psi respectively for mortar cubes.
6- Cement industries in Pakistan are currently operating at their maximum capacity
due to the boom in commercial and industrial construction within Pakistan.
7- Effect of GDP:
Following effects of GDP will govern the growth of cement industry in Pakistan:
Higher GDP growth has positive impact on cement demand
Cement demand growth rate was double the GDP growth rate in last three years
GDP growth is expected to continue to have same positive impact on demand growth.
8- Housing demand to grow:
Following indications have showed a considerable demand of cement in Pakistan:
Housing projects consume roughly 40% of cement demand
Currently 0.3mn houses are built annually against demand of 0.5mn
Low interest rates, post 9/11 remittances’ inflow, and real estate boom have helped housing sector growth.
Easy mortgage availability and announcement of low cost housing schemes will determine housing sector growth in the long-run.
9- Government’s development spending shall continue to rise due to:
Government development expenditures count for one third of total cement consumption.
Increase in development expenditures has helped cement demand to grow at very high rates.
Increase in PSDP- as announced in Medium Term Development Framework 2005-10 - will help cement demand to grow in the country.
Infrastructure development in a region triggers private development projects having even positive impact on cement demand.
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10- Pakistan cement industry is one the largest exporter in Asia, major markets are
of Afghanistan and Iraq will be after peace. Its increased GDP by exports,
providing cements in Large Dams Project and earthquake rehabilitations
projects.
11- Laboratory testing facilities meeting all American and European standards and
Vertical cement grinding mills.
12- Cement industry called major Performance Blue Chip in current economic
survey 2007-08 because during the first three quarters of the fiscal year 2007-08,
the combined paid-up capital of ten big companies was Rs. 91 billion, which
constituted 13.17 percent of the total listed capital at KSE in which Fauji
Fertilizer, DG Khan Cement, Lucky Cement played major role.
13- Today, we find a relatively better scenario as compare to past. Most of the
cement plants, that used to operate on furnace oil, have now been converted into
coal system, which has substantially reduced cost of production.
14- The most modern selection of production equipment possible in every major
department of the plant.
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6.2 Weaknesses
1- The stage of industrial development, in most of the segments, is still at a very low
level of technology and the existing industrial base is very narrow and consists of
very basic industries such as cement, sugar, textile, cigarette, edible oil, fertilizer,
soda ash, caustic soda, PVC etc.
2- Since cement is a specialized product, requiring sophisticated infrastructure and
production location. So, most of the cement industries in Pakistan are located
near/within mountainous regions that are rich in clay, iron and mineral capacity.
Structure of Cement industry in Pakistan is as such that there is not much
substitutability to buyers. Which shows that the Cross elasticity of demand is
negligible.
3- The customer has no choice at all to switch between two brands of cement due
to cartel of all of the cement manufacturers in Pakistan.
4- The freight charges are a massive 20% of the retail prices. The plants located
very close to each other and tapping the same market will have to expand their
markets which will increase their freight expenses. Dandot, Pioneer, Maple Leaf
and Garibwal are all located within a radius of 100 kilometers and are selling
bulk of their production in the same areas and will thus face serious competition
from each other.
5- Consumers face a tough decision with regards to prefer which brand over which
because of the similar pricing of cement industry. The formation of cartel by the
cement manufacturers have exploited local consumers a lot and this has led to
the concentrated degree of oligopoly, where the firms are acting as a single unit
to perform their monopoly. Their combined market power is simply a diluted
version of the dominance that a single firm with a monopoly market share can
exert.
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6.3 OpportunitIies
1- The local cement industry faces high upfront fuel costs. In order to facilitate their
conversion to coal, which is widely available in the country, the government has
given incentives for imported plant and equipment for coal firing units.
2- 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.
3- 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. Global market has vigorously taken
up the advantage of economy of scales and multinational giants now control
more than 40 per cent of world production (China not included). The recent
acquisition of Chakwal Cement by an Egyptian giant, Orascom may be a
beginning of such an entry in Pakistan by multinationals. New avenues for export
of cement are opening up for the indigenous industry as Sri Lanka has recently
shown interest to import 30,000 tons cement from Pakistan every month. If the
industry is able for avail the opportunity offered, it may secure a significant share
of Sri Lanka market by supplying 360,000 tons of cement annually.
6.4 Threats
1- Unanticipated increase in interest rates or less than expected demand growth might create severe crises for the sector couple of years forward.
2- Lack of demand or depressed demand in future will prove to be lethal for the sector that has just started to recover from the miseries of 90s. Lack of demand forced cement units to operate at very low capacity utilization in nineties. There was a fierce competition among cement manufacturers.
3- A price war was witnessed which ended up with no conqueror. Similar
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apprehensions exist for the future when there will be plenty of excess capacity. Any hurdle in the growth of cement demand may force the sector into the price war. Yet, we expect cement manufacturers to act prudent and learn lesson from the history. Any mistake, similar to the one made in the last decade, will again coerce the sector into the era where all are losers with no winner.
4- Main component of the cost is fuel. Pakistan's cement industry has converted their plants to coal considering it to be the cheapest fuel, but its price in international markets has gone up by more than 300 per cent in the last one year, which directly relate increasing the cost of production.
5- The demand of cement falls heavily during rainy weather in the country, which directly affects the running cost of a unit. It is only the rising levels of cement exports, which are sustaining the industry.
6- Instead of appreciating the marketing skills of cement entrepreneurs to explore new markets for cement, the industry is being pressurized constantly without realizing that any reduction in cement exports from Pakistan will not only deprive the country of foreign exchange ($2 billion this year), but will also result in losses to the industry.
7- The burden of increased input costs has to be borne by the consumers. It is only the government, which can provide relief to the consumers by cutting down or abolishing the central excise duty.
8- Problems of oversupply situation:
Following problems might arise with the oversupply situation in cement industry:
Lower capacity utilization will reduce benefits of economies of scale. High leverage will also adversely affect profitability of new plants.
New plants will gain market share at the cost of older players, which are not undergoing expansion. Large idle capacity is will create panic in players and this may result in price wars in the coming years.
9- IMF Package in Future can cause to decrease GDP and economical development in Pakistan. Which will also be cause to stop development of infrastructure. So it will have huge effect on cement industry also.
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7. CONCLUSION AND RECOMMENDATIONS
7.1 Conclusion
The law and order situation in the country is deteriorating day by day which affects all
the industries including cement industry. The economic crisis which hit the entire world
is another element which is making the cement industry business to decline. Due to the
declining situation of cement industry; there is a direct affect on the economy.
The investors tend to avoid investment in our country due to this critical situation. The
Government of Pakistan should make a concrete strategy and control the law and order
situation so that the investors invest or start some projects in our country. If the situation
is stable in our country the investors who want to do business in our country can play an
important role to raise the country’s economy.
We did Financial Analysis of top five companies of Pakistan cement Industry along with
a brief overview of overall Pakistan Cement Industry. Our Financial analysis included