Sectors The Cement Industry example essay topic

During the pre-partition era most of the industrial base was located at the areas that were to become the part of India. Pakistan, unfortunately inherited a weak industrial base. However, in case of cement, Pakistan was fortunate enough to inherit four cement manufacturing units with an aggregate installed capacity of 487,000 tons per annum. These units were located at Karachi, Rohr i, Dando t and Wah. Besides the weak industrial base, the Pakistan did not have entrepreneurs, therefore the private sector in the post independent era were shying away in making investment in the industrial development. In order to facilitate investment of private sectors towards the industry, PIDC was established in 1956.

Its objective was to establish manufacturing units and transfer it to the private sector. As per the mandate envisaged to the PIDC, it established two cement plants one at Daudkhel and the other at Hyderabad. Subsequently, more cement plants were commissioned and by the year 1971, there were 10 cement manufacturing units in the country with the production capacity of 3.657 million tons. Dr Mah boob-ul-Haq's famous slogan of 22 families owning the bulk of the assets of the country was the seed for nationalization. Hence, besides other sectors the cement industry was also nationalized in the year 1972. All the nationalized cement units were merged under a newly formulated State Cement Corporation of Pakistan (SECP).

The SECP objective / contribution towards the cement industry was: - Regulating, monitoring and price control of cement industry. - Establishing five new cement units with an installed capacity of 1.8 millions tons per annum. In early eighties "Margaret Thatcher" was able to revive the economy of England by privatization of large scale public sector units, and thus it became the role model for revival of the economy. Pakistan like other countries also jumped the bandwagon and initiated privatization of the large public sector units including cement industry.

Bulk of the SECP's cement units were privatized by the year 1992. At present there are only four cement units in the public sector. In mid eighties, the construction and other economic activities in the country were at their peak that resulted in severe shortage of cement. This deficit supply situation and the deregulation of cement price encouraged the private sector to venture in the cement industry. Several new units were established during 1985 to 91 including Parkland, Dadabhoy, and Fecto etc. Most of the cement units were financed by NDFC.

NDFC, and other DFI's not only financed cement and sugar plants but also encouraged Local Manufactured Financing (LM) due to which the country is now capable of manufacturing complete sugar and cement plants based on indigenous technology. Presently, the installed capacity of the cement units in the country is about 16.300 million tons per annum. The installed capacities and its utilization of the last six years is presented in the graph. In the year 1995-96 the capacity utilization of the industry was 93% that has declined to 43% by the year 2000-01. The reason for such a declining trend was that the demand of cement sector due to depressed economy has remained stagnant in the last six years. Comparatively, the installed capacity during the same period has increased from 10.270 millions tons to 16.300 million tons.

The growth rate for of the installed capacity during the same period was 58.71% or 11.74% per annum. It may be pointed out that the cement industry had enjoyed various peaks and in last forty years. In order to identify this trend an analysis has been done by taking eight periods of five years each and decline / growth in each period have been ascertained. The analysis is presented in the table. Period Year Production (million tons) Growth for The period Avg.

The growths in these periods were the highest that is 62% and 54%, respectively. However, these periods had the advantage of a large market size as Bangladesh was not created by then. After the breakup of Pakistan, period-5 (1980-85) and period-6 (1985-90) were the best for the cement industry as it realized the growth rates of 33% and 30% respectively. This incidentally, correlates more or less with the economic trend in the country. Some of the contributing factors that have adversely affected the cement industry are: i) The demand of the cement due to less economic activates has remained stagnant during the last six years. Comparatively, the installed capacity during the same period has increased from 10.720 million tons to 16.300 million tons with an average growth rate of 11.4% per annum ii) Utilities are the major factor in the cost of production of cement.

In this context: a) In early nineties the price of furnace oil was increasing at an average growth rate of 4%, but in the last five years it has increased at an average growth rate of 55%. b) The electric charges have also increased by 211% in last ten years. c) The government has decided to provide a level playing field to the cement units whether they are based on furnace oil or natural gas. Thus the price of the natural gas shall fluctuate in parity with the international prices of furnace oil. However, a minimum 10% differential between gas price and furnace oil will be maintained. In view of this policy the government has increased the gas prices three times in the year 1991: 16.5% in the first six months, 10% in the last six months, 10% in June and another 6.5% in September.) The Taxes in Pakistan for cement industry industries are on the higher side. Comparatively the taxes in other developing countries are on quite lower as illustrated below: - Pakistan 35% - Bangladesh 10.31% - India 15.2% iv) The concept of mini-cement plant earlier propagated by DFI's had resulted in the number of cement plants that are not large enough to absorb all of their fixed cost. The cement industry could be revived by adopting the following measures that have also been recommended by various experts from time to time: a) The cement plant could be converted to natural gas without major investment as most of the plants have dual firing system.

However, due to the government policy of linking the natural gas price with the international furnace oil, gas conversion has not remained that viable solution. b) The second alternative would be to convert the cement plant to coal. Once the cement plants are converted to coal firing system, it is expected to save unto 50% cost compared to the plant based on furnace oil. In this context, cement plants such as FECTO, Pioneer Cement and Lucky Star Cement have converted their plant or planning to convert to coal. c) The excise duty on cement should be reduced to the level of that of India. d) To facilitate export, the export rebate earlier granted may be allowed. Moreover, the required infrastructure such as storage facilities near the port and dedicated loading berth must be developed. This will cut down on the waiting time of the ships and thus would reducing the transportation cost. e) Last but not least, the rehabilitation of the sick units at a faster pace must be undertaken.

This would generate economic activities and the cement units would be able to operate at a higher capacity utilization that will help them in absorbing their fixed cost more efficiently.