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Industrial and Competitive Analysis: Cement Industry of Pakistan
Industrial and Competitive Analysis: Cement Industry of Pakistan
COMPETITIVE ANALYSIS
CEMENT INDUSTRY OF PAKISTAN
TEAM MEMBERS:
SYED USMAN WAZIR (GL)
FATIMA SYED
QURAT-UL-AIN RAUF
ASIM REHMAN
ZEESHAN AHMED
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Table of Contents
Introduction: ................................................................................................................................................. 3
Structure:..................................................................................................................................................... 4
Conduct ....................................................................................................................................................... 5
Performance ................................................................................................................................................. 5
Advertisements: ........................................................................................................................................... 9
Conclusion: ................................................................................................................................................23
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INDUSTRY: - CEMENT INDUSTRY OF PAKISTAN
Introduction:
Cement industry is indeed 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 buoyant once again.
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Structure:
A market is a group of buyers and sellers exchanging goods that are highly substitutable for one
another. Markets are defined by demand conditions; they embody the zone of consumer choice for
the goods.
1. Product type
2. Geographic area.
Product type:
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.
Geographical Area:
The other factor i.e. geographic location also doesn’t affects a lot considering the flexibility of
demand. Example can be taken from the fact that if DG cement in DG KHAN raises its price and
MAPLE LEAF CEMENT in DaudKhel will raise its price to match DG cement’s. This is due to
cartel of all of the cement manufacturers in Pakistan. Thus the customer has no choice at all to
switch between two brands of cement. As the cement market is moving from a virtual 'sellers'
market' to an over-supply situation, it is expected that when prices stagnate and profitability
becomes a function of volume and economies of scale, location advantage and proximity to markets
will become extremely important factors. At present 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
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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.
Market Share:
The market share if Cement industry is as such that since large number of manufacturers are in the
market and are targeting the entire market through the formation of Cartel. So the dominancy of
market share is yet to be analyzed by us. This dominancy can be attributed to two factors:
1. Brand name
2. Product quality.
Since pricing is similar so production capacity can provide a vague idea with regards to the market
Conduct
Conduct
Cement industries in Pakistan are currently operating at their maximum capacity due to the boom in
commercial and industrial construction within Pakistan. 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
Performance
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. Deregulation after accession
of Pakistan to WTO is expected to open the window of competition from cheaper markets. There
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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.
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
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
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imperative for Pakistani cement industry, on one hand, to sustain existing export markets and, on
Herfindahl Index
In Pakistan there are 27 cement manufacturers that are playing a vital role in the build up of country’s
economy and contribution towards growth and prosperity. For the calculation of Herfindahl index we have
chosen 5 dominant industries of Pakistan, on the basis of their production capacity. The market share of
• DG cement 9.8%
Where si is the market share of firm i in the market and n is the number of firms.
Since the Hirfindahl index is above the standard set of (0.18) for an unequally distributed market share
industry. This indicates that there is a high concentration in the cement industry.
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Market share
Askari cement
(NZP)
DG cement
Lucky cement
Maple leaf
Pioneer
cement
Others
Lerners Index:
Average industry price of cement bag/50Kg = Rs.235
L = (P-C)/P
Where L is the Lerners index and is also = H/EoP for the whole industry.
Now L = (235-192.5)/235
= 0.181
And
EoP = .395/.181
= 2.18
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Advertisements:
The firm’s optimal level of advertising intensity (Advertisement/Revenue) is equal to the ratio of its elasticity
of demand to the price elasticity of demand that it faces. The important implication of this demonstration is
that the level of advertising is chosen simultaneously with the level of price, there is no cause and effect
For oligopolistic competition as in cement industry, the firms have to make decisions taking into account the
decision of their rivals. So advertising decisions are measured to the extent on which amount of reaction it
would generate from the rival firms. In brief we can conclude that advertising is an instrument of an
oligopolistic competition.
marginal cost c. The demand for the good is P = a-bQ and as for the R&D effort, the costs of setting up a
research lab are K and the probability that the lab will successfully develop the product is %. If both firms
successfully develop the product they will be a Cournot duopoly. While, if one of them develops a new
product then the first mover advantage would embark rewarding the developer to maintain a monopoly.
Everybody’s doing it, so why shouldn’t we? This is probably the thought reverberating through every cement
magnate’s mind these days. The current expansion spree now seems to be a bandwagon effect. Cement
manufacturers, especially the larger ones, are sitting on the horns of a dilemma where the only way to
maintain market share is to expand capacity, but only at the expense of increasing future unutilized capacity.
It does tend to seem as if the industry may be gradually, albeit inadvertently, digging its own grave.
A proverbial David vs. Goliath scenario seems to be developing where the larger players like Lucky, DG
Khan, Bestway, Pakistan Cement, etc. may cause a few smaller (especially those not expanding) cement
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manufacturers to struggle for existence, or eventually sell out operations to one of these large producers.
However, within the group of large producers, we could have an interesting scenario in itself, where the local
cement industry’s big boys, Lucky and DG Khan, are likely to be given a tough time by the international
• Cement industry being a commodity industry provides very few barriers to entry.
• Positive demand and profitability outlook attract new entrants until profitability is affected.
• Industry went through two such capacity addition cycles during 90’s.
• However, current capacity addition cycles is the largest as industry capacity will be increased from
• These factors indicate that although it is considerably easier for a new entrant to enter into the
business with regards to the conditions. But the staggering amount of investment required makes in
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Capacity addition cycles in the industry
Mn Tpa
45 45%
40 40%
35 35%
30 30%
25 25%
20 20%
15 15%
10 10%
5 5%
0 0%
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06E
FY07E
FY08E
FY09E
FY10E
Capactiy Increase in Capacity (RHS)
industry of Pakistan:
• Capacity in the northern zone will grow from 14.7mn tpa in FY05 to 33.8mn tpa by FY08.
• Concentration of expansion projects away from sea routes indicates these projects are targeted at
domestic markets.
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Further more, we have also researched on the region wise industrial capacity so that to present a conclusive
Capacity
other factors will also affect the growth of cement industry as well. These are as follows:
• Earthquake Rehabilitation
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• Announcement of large dams
Backlog in developmental activities will help in such a way as the Cement demand remained stagnated during
90’s owing to lack of development activities. And if we conduct a comparison of per capita consumption
between Pakistan and India we can find out that demand of cement in Pakistan with respect to its geographic
size has stagnated. Per capita consumption was 73kg during FY97 in both countries. Consumption in India
during FY05 was 115kg/capita whereas ours was 95kg/capita. Our consumption is low compared to region
countries and world average and so our per capita consumption may well remain below world average in the
medium run.
Kg/Capita
130
Pakistan India
120
110
100
90
80
70
60
50
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
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Kg/Capita
600
Per capita cement consumption 625 1095
500 560
530
470
400
World Average 300 375
300
200
100
95 115
0 50
M ala ysi a
Chi na
Pak ista n
Iran
Ind ia
Ban gla des h
UA E
USA
EU
Effect of GDP:
Following effects of GDP will govern the growth of cement industry in Pakistan:
• 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
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Housing demand to grow:
grow:
Following indications have showed a considerable demand of cement in Pakistan:
• 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
• 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
• Infrastructure development in a region triggers private development projects having even positive
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Govt.’s
Govt.’s development spending:
spending:
Mn PKR Bn PKR
35 700
30 600
25 500
20 400
15 300
10 200
5 100
- -
FY06E
FY07E
FY08E
FY09E
FY10E
FY00
FY01
FY02
FY03
FY04
FY05
developmental programs. The conditions that constitute this growth due to earthquake are as follows:
• Reconstruction work is expected to generate cement demand of 4mn tons over next 3-4 years
• Positive impact on demand will be much more evident from 2HFY07 onwards.
• Cement manufacturers in northern zone will be the main beneficiaries of this demand growth
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Demand generation from large dams:
dams:
The demand for cement will also increase due to following observations:
• Construction of four large dams will generate demand of 3.7mn tons as construction activities start
• Our estimate does not include demand generation from Skardu-Katzarah dam as its feasibility study
• Extent of demand generation will depend on size of dam, type of dam, and extent of
• Bhasha dam will generate maximum demand as it is RCC concrete dam whereas other dams being
• Resettlement activities for Kalabagh dam will generate maximum demand as it is located in a highly
populated area.
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Cement demand generation from large dams:
dams:
Dams Munda Bhasha Kuram Kalabagh Akhori Katzarah
Tangi
2. Cost of Kuram Tangi dam is converted to USD based on PKR 60/USD parity. (Original cost PKR
13.241bn)
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Competition in export markets:
markets:
With regards to the competition in export markets, we have observed following behaviors of cement industry
in Pakistan:
• 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
Problems of overcapacity:
overcapacity:
Overcapacity situation in local market is due to:
• Cement industry has grown at 31% CAGR from capacity of 20mn tpa to 43.9mn tpa by FY08
• Current wave of new capacity expansions have reduced capacity utilization rates despite demand
• We expect capacity utilization levels to decline to 60% in FY07 and 56% during FY08.
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Oversupply situation in local markets:
markets:
Mn tons
50 90%
45 85%
40
80%
35
30 75%
25 70%
20 65%
15
60%
10
5 55%
0 50%
FY01
FY02
FY03
FY04
FY05
FY06E
FY07E
FY08E
FY09E
FY10E
Sales Capactiy Capacity Utilization (RHS)
• Lower capacity utilization will reduce benefits of economies of scale. High leverage will also
• New plants will gain market share at the cost of older players which are not undergoing expansion
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Idle Capacity of various players:
players:
FY06 FY07 FY08
higher debt obligations will have greater incentive to cheat from current cartel arrangements and as the
Financial and depreciation costs were PKR690/ton in FY04 that will increase to PKR1260/ton during FY07.
Similarly, at 60% capacity utilization level, financial obligations/ton (current maturity + interest expenses) will
be PKR 298/ton for Pioneer and PKR 1158/ton for Maple Leaf cement during FY07. And an increase of
10% in capacity utilization level declines financial obligations per ton by 14%. And if capacity utilization
levels are increased to 70%, financial obligations will decline to PKR 256/ton for Pioneer and PKR 998/ton
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Price reductions are likely in the coming years:
years:
This observation is mainly due to following factors:
• Cement industry is currently enjoying historically high prices, margins and utilization rates
• Historically, lower capacity utilization rates have resulted in price wars among manufacturers
• Lower sales volume and high leverage due to expansion will create problems for players to meet debt
obligations
• This is likely to trigger price wars as players will try to gain market share
• Price wars will lower margins creating further problems for players
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Conclusion:
Consolidation is needed for industry stability because of following observations that we as a group have
made:
• Industry needs one or two dominant players for long-term sustainability in prices and profits
• Top four players command 35% of market share in the industry that will be increased to 46% in
FY08.
• World norm is that top four players have more than 60% market share
• Consolidation process will be needed to increase market share of larger players rather than going for
capacity expansions
• We may see acquisitions in the industry as the industry goes through overcapacity cycle
• Acquisitions were made at EV/ton of USD100-130/ton in India excluding GACL acquisition that at
EV of USD193/ton.
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