MEF

Department of Economics
Analysis of Industries in Pakistan

Cement Industry in Pakistan

 Historical Overview of Cement Industry in
Pakistan
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.
 Historical Overview of Cement Industry in
Pakistan
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.
 Historical Overview of Cement Industry in
Pakistan
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.
 Historical Overview of Cement Industry in Pakistan

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 with in the world and local economy, five more
plants were set up to gratify cement requirements locally.
However, the economy of Pakistan local demand did not
grow as expected so from during 1995 to 2000 and , the
cement sector experienced poor growth rates of 8% per
annum. Therefore industry expansion of the nineties,
cement manufacturers had to go through a problematic
period of capacity utilization.
 Historical Overview of Cement Industry in Pakistan

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.
 Market Structure of Cement Industry in Pakistan

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.
Interdependence & Collusion 
Product homogeneity.
Latent barriers to entry
 Market Structure of Cement Industry in Pakistan
The Domination of industry 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%

Attock Cement Bestway Cement

6% 11%
Pioneer Cement
4%
Lafarge Cement
6%
Kohat Cement DG Khan Cement
5% 15%
Maple Leaf Cement
10%
 Market Structure of Cement Industry in Pakistan
The Domination of industry by a few major players
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
 Market Structure of Cement Industry in Pakistan
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.
 Market Structure of Cement Industry in Pakistan
Interdependence & Collusion 
 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
 Market Structure of Cement Industry in Pakistan
Interdependence & Collusion 
 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.
 Market Structure of Cement Industry in Pakistan
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.
 Market Structure of Cement Industry in Pakistan
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.
 Market Structure of Cement Industry in Pakistan
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 5th 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:
 Market Structure of Cement Industry in Pakistan
Growth Trends & Expansion Cycles
 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.
 Market Structure of Cement Industry in Pakistan
Growth Trends & Expansion Cycles
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 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.
 Market Structure of Cement Industry in Pakistan
Growth Trends & Expansion Cycles
Mn Tpa
45
35
25
15
5

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.
Growth Trends & Expansion Cycles
Capacity growth along with utilization and growth in total dispatches can be observed
below:
FY Capacity % Change TOTAL % change Utilization Excess Cap.
(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
 Market Structure of Cement Industry in Pakistan
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.
 Market Structure of Cement Industry in Pakistan
Factors Affecting Growth
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.
 Market Structure of Cement Industry in Pakistan
Factors Affecting Growth
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.
 Market Structure of Cement Industry in Pakistan
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.
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