sm final report cement intdustry

Table of Contents

Chapter 1: Past of Cement Industry of Pakistan......................................................1

1.0 Global Scenario of the Cement Industry.............................................................1

1.1 Cement Industry - Regional Review....................................................................11.2 Export Outlook.....................................................................................................2

Chapter 2: Present of Cement Industry of Pakistan.................................................4

2.0 Cement Industry of Pakistan................................................................................4

2.1 Overview..............................................................................................................42.2 Growth Pattern of Cement Industry of Pakistan..................................................62.3 Financial Analysis................................................................................................72.4 Contribution to National Economy by Cement Sector:.......................................82.5 Current Scenario of the Construction Sector.......................................................82.6 Government Attitude towards Cement Sector.....................................................92.7 Economical Changes..........................................................................................102.8 Competition........................................................................................................12

Chapter 3: Lafarge Cement......................................................................................15

3.0 Introduction to Lafarge Cement.........................................................................15

3.1 Overview............................................................................................................153.2 Lafarge Pakistan Cement...................................................................................163.3 Analysis of Mission Statement...........................................................................17

Chapter 4: Financials.................................................................................................18

4.0 Comparative Financial Ratio Analysis...............................................................18

Chapter 5: Internal and External Analysis.............................................................28

5.0 Internal and External Analysis...........................................................................28

5.1 SWOT Analysis.................................................................................................285.2 PEST Analysis...................................................................................................435.3 Porter’s Five Forces...........................................................................................495.4 BCG Matrix........................................................................................................51

Chapter 6: Future Outlook.......................................................................................53

6.0 Strategies...............................................................................................................53

6.1 Demand Factors/ Exploring New Markets.........................................................536.2 Location..............................................................................................................556.3 Infrastructure......................................................................................................566.4 Operational Cost Cutting Measures...................................................................586.4 Regulatory..........................................................................................................59

7.0 Recommendations..................................................................................................60

Strategic Management Term Report

Chapter 1: Past of Cement Industry of Pakistan

1.0 Global Scenario of the Cement Industry

During the year 2004 world’s cement production has increased by 2.56% by 50

million tonnes and consumption increased by 3% as compared to previous year.

World demand for cement is forecast to increase 5 percent per year through 2008.

1.1 Cement Industry - Regional Review

China:

China is the largest producer and consumer of cement, having 850 million

tonnes production capacity and consumed 36 percent of total world’s

production. From 2000 to 2004, the cement industry showed an average

annual growth of 9 %. In 2004, the total output of cement in China increased

by 12.5 % from 2003. The industry has benefited from the growth in real

estate and the rapid growth of the national economy. It is anticipated that

Chinese cement industry will grow by 5% till 2008, owing to boom in

construction activity, and will account for 44% of global demand in 2008. The

demand for cement is expected to continue to grow as China implements its

strategies of developing the western regions, reinvigorating the traditional

industrial bases in northeast China, its urbanization drive, its projects for

transportation of natural gas, and projects related to the 2008 Beijing

Olympics and the 2010 Shanghai World Expo.

India:

With the total installed capacity 163 million tonnes in 2005 India is the second

largest producer of cement in the world accounting for approximately 6% of

the global production. Actual cement production in 2003-04 was 123.50

million tonnes as against a production of 116.35 million tonnes in 2002-03,

which is an increase of 6.15% over 2002-03. Cement production during the

year 2004-05 (April-January, 2004-05) was 108.06 million tonnes

(provisional), registering a growth of 7.10%. The cement production is on an

up move because government has increased spending on infrastructure and

huge investments are flowing in the road and the power sectors. Other sectors

like ports and airports will also see rise in investments over the next 6 to 12

months. Demand in the housing sector and the revival in the capex cycle are

further driving the demand for cement. Production target of 133 million tonnes

1 | P a g eShaheed Zulfiqar Ali Bhutto Institute of Science and Technology


has been set for the year 2004-05 and industry is expected to grow at the rate

of 10% per annum and it is expected to add capacity of 40-52 million tonnes,

mainly through expansion of existing plants.

Iran:

Iran’s current production capacity stands at 32 million tonnes, and it is

expected that capacity will rise to more than70 million tonnes by 2010. During

the current year three plants are expected to come online and capacity will

reach up to 37 million tonnes at the end of the year. Current boom in housing

sector and overall infrastructure activity in the country, Iran is consuming

most of its production within the country. However after completion of its

ongoing expansion in 2010, it would be able to export the commodity in the

region. Iran stands 14th in terms of cement production, while 12th and 15th in

terms of consumption and export of the commodity respectively. Further due

to ample availability of raw material and fuel Iran has most economical rates

of the commodity in the world.

1.2 Export Outlook

During FY05, cement export stood at 1.6 million tonnes, representing 40% growth as

compared to last corresponding year (154% increases in 2003-04). Growth in cement

export remained slow down during FY05 owing to the fact that superfluous domestic

demand has surpassed supply as most of the local cement manufacturers were

operating at 100% capacity and still weren’t able to meet present demand. Presently

some of the cement companies are exporting cement to Afghanistan, Iraq and UAE

only to maintain their presence in these markets. After completion of major expansion

plans in Pakistan in 2007, there would be a surplus to export in these markets however

in the same period Iran would also be able to approach vigorously these markets as its

most of the cement plant will start to come online. At that juncture there would be

extreme competition between both countries to capture these markets, especially the

war-ravaged countries (Iraq and Afghanistan). Iran would get benefit in terms of price

as cement prices in Iran is among the cheapest in the world as the price of cement in

Iran remained between US $ 20 - 25 per ton. On the other hand it is expected that

being the US ally, Pakistan would get most of the favour in order to keep its market

share in these markets given the fact that all the construction activities in Iraq and

Afghanistan would be taken by US. Despite the fact that cement constitutes as one of



the basic necessities for shelter, the policy makers have subjected the cement sector to

the highest taxation in the region. The levy of General Sales Tax (GST) on cement is

Rs660 per ton in Pakistan as compared to Rs320 in India. In the light of this tax

regime, it is said that Pakistan has one of the highest tax rates on cement in the Asian

region. The impact of such tax and duty structure has resulted in almost 40 per cent

increase in the cement price per 50 kg bag when compared to India suppressing

demand for Pakistan cement.

World’s Cement Production (Qty = 000 tonnes)

Countries 2001 2002 2003 2004 2005

United States 90,450 91,300 92,600 99,000 99,100

Brazil 39,500 39,500 40,000 38,000 39,000

China 626,500 705,000 750,000 934,000 1,000,000

Egypt 24,500 23,000 26000 28,000 27,000

France 19,839 20,000 20000 21,000 20,000

Germany 28,034 30,000 28000 32,000 32,000

India 100,000 100,000 110,000 125,000 130,000

Indonesia 31,100 33,000 34,0000 36,000 37,000

Iran 26,650 30,000 31,000 30,000 32,000

Italy 39,804 40,000 40,000 38,000 38,000

Japan 76,550 71,800 72,000 67,400 66,000

Korea 52,012 55,500 56,000 53,900 50,000

Mexico 29,966 31,100 31,500 35,000 36,000

Pakistan 9,876 9,985 11,410 13,344 17,112

Russia 35,100 37,700 40,000 43,000 45,000

Saudi Arabia 20,608 21,000 23,000 23,000 24,000

Spain 40,512 42,500 40,000 46,800 48,000

Thailand 27,913 31,700 35,000 35,600 40,000

Turkey 30,120 32,600 33,000 38,000 38,000

Others 351,014 350,015 348,590 367,656 374,888

World total 1,700,000 1800,000 1,860,000 2,130,000 2,220,000

Chapter 2: Present of Cement Industry of Pakistan



2.0 Cement Industry of Pakistan

2.1 Overview

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 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 24.

The cement industry in Pakistan has come a long way since independence when

country had less than half a million tonnes per annum production capacity. By now it

has exceeded 10 million tonnes per annum as a result of establishment of new

manufacturing facilities and expansion by existing units. Privatization and effective

price decontrol in 1991-92 heralded a new era in which the industry has reached a

level where surplus production after meeting local demand is expected in 1997.

The cement industry is 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 high in recent past, it has recovered during the last

couple of years and is buoyant once again.

There are in all 23 units, from which 4 units are in the public sector while the

remaining 19 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 Pakistan cement market is divided into two discrete regions with 29

firms’ production capacity of 44.09 million tonnes:

North Region:

North Regions consists of the following areas:

Punjab

NWFP (Khayber Pakhtoon Khua)

Azad Kashmir



Upper parts of Balochistan

South Region:

Entire province of Sindh

Lower parts of Balochistan

Province wise distribution of cement plants is as under.

Providence Units Capacity (MillionTonnes)

Punjab 8 7.488

Sindh 8 3.851

NWFP 6 4.945

Baluchistan 1 0.758

Total 23 17.040



Three additional cement plants with installed capacity of over 2.1 million tonnes are

in the final stage of completion despite the available excess capacity in this sector.

The following table shows installation of new cement factories and expansion of the

existing facilities during the current decade.

2.2 Growth Pattern of Cement Industry of Pakistan

Cement is one of the major industries of Pakistan as the country is rich in cement raw

material. The last few years have been a golden period for cement manufacturers, as

the government increased spending on infrastructure development. High commercial

activity and rising demand for housing on account of higher per capita income has

kept cement off take growth in double digits.

During the financial year-07, cement sales registered a growth of 31 percent to 17.53

million tonnes as against 13.5 million tonnes sold last year. The cement sales during

July-February-08 showed an increase, both in domestic and regional markets to 18.17

million tonnes. The domestic sales registered an increase of 7.2 percent to 14.4

million tonnes in the current period as compared to 13.5 million tonnes last year

whereas exports stood at 3.7 million tonnes as against 1.8 million tonnes in the

corresponding period last year, showing an increase of 110 percent.

Pakistan cement industry has a huge potential for export of cement to neighbouring

countries like India, U.A.E, Afghanistan, Iraq and Russian states. There has been a

robust growth of cement demand seen both in domestic and export market during the

fiscal year ended June 30, 2007. The industry achieved an overall growth of 32% with

domestic demand of cement increased by 24.95% where as exports increased by

111.86%. The overall growth achieved by cement factories for the year under review

was 111.29% consisting of domestic and exports markets at 71.02% and 335.12%

respectively.



2.3 Financial Analysis

Lafarge Lucky Cement DG FC

Net Profit -21% 17% 1% 3%

Total expenses as percentage of sales 25.40% 24% 21% 8%

Sales 3.4bn 26.3 bn 16.2 bn 3.8 bn

Footing 18 bn 38 bn 47 bn 27 bn

Selling expenses as a percentage of sales 8% 9% 6% 1%

Administration expenses as percentage of sales 6% 1% 1% 3%

Finance cost 384 mn 1.2 bn 1.9 bn 41.2 mn

Total debt/Total equity 1.15 0.65 0.77 1.79

‘Looking at the net Profit margin we can clearly see that even though the industry

average stands at around 7% (17+1+3= 20/3= 7) for the major players which were

similar to Lafarge in size and investment, Lafarge had a negative return of around

21% and this reflected operational inefficiency on its part as it was not able to

actually capitalize on its sales because its sales were being regulated by Lafarge

Global. Their philosophy for distributing orders which is controlled by their central

sales department is based on forwarding the export orders to the plant located

nearest to the country from which export orders were generated and as a result

Lafarge Pakistan could export only to Afghanistan and India. Up until now

Afghanistan was generating demand but India was registering decreased demand

as by 2010 major capacity expansion plans were coming online in India

contributing to decreased demand and thus Lafarge Pakistan was not able to

generate additional sales as compared to other Pakistani players who were

exporting to east Africa, middle east and Saudi Arabia.

Industry cost averages was around (24+21+8= 18%) and the company’s total

expenses as a percentage of sales were around 26%.

Selling expenses as a percentage of sales stood at 8% and were way above the

industry average of (9+6+1)/3= 5.2%

Administration expenses as a percentage of sales in Lafarge were also higher than

the industry and stood at 6% whereas the industry average stood at 1.6’%.



2.4 Contribution to National Economy by Cement Sector:

The cement industry is contributing Rs 30 billion to the national exchequer in the

form of taxes. This sector has invested about Rs 100 billion in capacity expansion

over the last four years. The industry is divided into two broad regions. The northern

region has over 87% share in total cement dispatches while the units based in the

southern region contributes 13% to the annual cement sale. The per capita

consumption of cement has risen from 117 kg in FY06 to 131 kg in FY07.

The cement industry of Pakistan entered the export markets a few years back, and has

established its reputation as a good quality product. The latest information is that

India will import more cement from Pakistan. So far 130,000 tonnes cement has been

exported to the neighboring country.

2.5 Current Scenario of the Construction Sector

Pakistan has one of the highest population growth rates in the world, touching 3%.

This has prompted a sizable demand for housing facilities in the country. According

to estimates of construction industry, there is a huge backlog of about 6.25 million

housing units in the country. Bulk of the current demand of 0.6 million units needed

every year is for urban areas. With greater urbanization the demand for cement is

expected to grow at an average of nearly 7% per annum.

The demand for cement for infrastructure units is expected to grow with the

commencement of work on motorways, power plants, Islamabad New City, Karachi

Package and Ghazi Brotha dam. If all these projects are implemented as per schedule,

the demand for cement is expected to grow at a higher rate.

The construction sector in Pakistan has played an important role in providing jobs and

in revival of economy. It provided jobs to about 7 per cent of the total employed labor

force or to 2.5 million persons, during 1999-2000. There is a lot of scope for

importing latest technological advancements / hi-tech building materials. Construction

equipment & plants with the latest practices adopted in the developed Countries are

also a dire requirement here. Moreover, Quality Control & Materials Testing

Laboratories & Equipment are need of the time. There is unlimited scope for

investment in this sector.

Globally, construction and engineering services industry is regarded as one of the

largest fragmented industry accounting for 10-12% of GDP in many countries.

Benefiting from both public and private investments, the construction industry is a



prime source of employment generation offering job opportunities to millions of

unskilled, semi-skilled and skilled work force. The total world spending on

construction amounted to US$3.2 trillion in 1998.

The main factors behind increase in demand of cement were: 60 percent higher Public

Sector Development Projects (PSDP) allocation, seven percent GDP growth,

increasing number of real estate development projects for commercial and residential

use, developing export market and expected construction of mega dams. The

operating capacity of cement in FY05 and FY06 was 18 million and 21million tonnes,

which rose to 37 million tonnes by the end of FY07.

Moreover, this rising trend is expected to be short-lived due to higher interest rates

and inflationary concerns are likely to make it disadvantageous for investors to enter

the construction industry. In addition to this, to control real estate prices the

government is considering imposing a tax on it.

2.6 Government Attitude towards Cement Sector

2.6.1 Tax structure

Instead of providing any relief in the budget, the sector was further penalized with a

3% increase in sale tax making it 18%. So far, the manufacturers have been able to

pass on the increase to consumers but the situation is unlikely to continue. However,

the possibility of formation of a cartel cannot be ruled out. Since massive investment

has been made in the sector, any reduction in price of cement can reduce profit margin

of all the units.

Formation of cartel and fixation of price at a level high enough to cover increasing

cost of inputs and ensure reasonable profit margin may provide short-term relief to the

manufactures. Such a cartel may be against the interest of consumer but can help the

manufacturer to survive with some dignity. Formation and smooth operation of a

cartel is generally difficult but in the case of cement industry it may not so because

the only restriction could be on the level of capacity utilization along with a modest

uniform reduction in the price of cement. However, the units are in the diverse state of

financial health, enjoy different level of competitive advantage, and therefore need

different prescriptions to maintain their profitability.

2.6.2 Excise Duty

In budget 2008-2009 the federal excise duty on cement has been increased to Rs 900

per tonne from the existing base of Rs 750 per tonne.



2.6.3 Cement Export

The federal government's decision to allow export of clinker and cement by the

private sector has been hidden due to absence of necessary rules and regulations. The

export consignment of clinker by a unit was delayed as the customs authorities

refused to allow export. The federal government on August 13 issued a notification

which stated "Export of cement and clinker will be allowed by sea on such terms and

conditions as may be notified by the ministry of commerce.

Since consumption of cement in southern region has gone down and northern region

has attained self-sufficiency, units located in southern region are forced to cut down

their capacity utilization. The possibility of cement export is the proverbial silver

lining for the recession-torn industry according to analysts at AKD Securities While

there are cement deficient countries like Bangladesh and Sri Lanka importing

approximately 2 million tonnes per annum each, there is tough competition from India

and Chinese suppliers.

In fact, apart from the prices offered by Pakistani manufacturers, lack of facilities for

handling bulk export of cement has become a major impediment — bulk handling is

cheaper than handling bagged cement.

Export of cement is necessary for the existence and survival of the industry rather

than a source of profit. The announcement of policy on cement export has created

positive sentiments.

2.7 Economical Changes

2.7.1 Major Economical Changes

1. 2003-2004: There was decline in the production during the FY03-FY04. The

sharp fluctuations in cement prices and relatively lesser demand for cement

have been responsible for the decline in the cement production.

2. 2004-2005: At the end of 2004, there were 21 cement companies listed with

KSE. The cement industry was one of the best performing sectors in the stock

market. Its market capitalization increased from Rs 65.1 billion on June 2004

to Rs 75.5 billion in March 31, 2005. Recording a growth of Rs 16.0 percent.

3. 2005-2006: The cement industry in the country has shown significant growth.

The rise in construction activity is equally shared by the private construction

sector and Public Sector Development Program (PSDP). The total production

of cement was recorded at 12.2 million tonnes during the FY05-FY06



compared with 11.2 million tonnes in FY04-FY05; a growth of 9.75% was

recorded. The boost during the period (July-March) 2005-06 in the

performance of the cement industry activity is because of the high level of

construction activity in the country and increased development expenditure by

the Government. Due to an enormous increase in demand of cement in recent

years almost all of the cement units working in Pakistan are on the path to

future expansions. Due to huge demand the retail price of cement was reach on

Rs. 430/ bag.

4. 2006-2007: Cement demand’s strong correlation with the GDP growth rate

and 7% GDP growth in FY07. During the FY07, cement sales registered a

growth of 31% to 17.53 million tonnes versus 13.35 million tonnes sold in the

corresponding period of last year. Local sales grew up by 26 5 and reached at

15.38 million tonnes, while exports increased massively by around 85%. The

retail price of cement was decreased by Rs. 430 to Rs. 315/ bag during the

FY07.

2.7.2 Situations Prevailing in Demand and Supply of Cement

The supply and demand gap was in the favor of the manufacturers for the last decade

but now situation has changed due to the increase in supply as compared to the

demand by 1997. Previously, demand has grown at an average rate of 7%, with the

Northern region averaging 8% and Southern region lagging behind at 4%. There is

much pessimism about the industry's future due to a tremendous increase in supply

expected by the end of next year.

Logically problem lies in the process. New plants are being established and the

existing plants are expanding, therefore the demand and supply equation is bound to

create surpluses. However, in order to control the situation the actual progress is

slower than the planned which could help in reducing the supply in the future.

Factors which can possibly change the surplus position into a near-equilibrium

between demand and supply are:-

1. If the mega sized infrastructure projects start, it could increase the demand for

cement and surplus could be reduced.

2. Increase in the export of cement.

3. Slowing down the expansion and addition plans

4. Formation of manufacturers' cartel to avoid price decline



2.7.3 Effect on Sector Due to Change in Interest Rate

The cement industry in Pakistan had secured loans of Rs75 billion for increasing its

production capacity from 38 million ton to 49 million ton by 2011. Increased in

interest rate can be caused of shortage of bank credits, consumer financing and loan

has shrink. As interest rate touched sky-high levels in late nineties, which increased

the burden of financial charges on relatively highly leveraged cement sector. State

Bank discount rate was as high as 13% in 1998-1999. Currently, SBP discount rate

stands at 9%, although we expect a rising trend in the rates in the coming year but we

do not anticipate interest rates to soar as high as they were in late nineties. Our long-

term stance on interest rates is stable. By 2006, when cement units, in general, have

start interest payments by 2006, a stable debt service scenario occurs. However,

substantial cash outflows in the form of financial charges are likely to cause decline in

available cash for payouts.

Unanticipated increase in interest rates or less than expected demand growth might

create severe crises for the sector couple of years forward

2.8 Competition

2.8.1 Competition in the Cement Industry

As the cement market is rapidly moving towards the over-supply situation, the prices

stagnates and profitability starts depending upon volume and economies of scale. In

such situations advantages from location and closeness to markets become extremely

important.

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 Garibwal are all located within a radius of 100

kilometers and are selling bulk of their production in the same areas due to which they

are facing serious competition from each other.

2.8.2 Key Players

Until recently there were 24 cement manufacturing units in the country which were

reduced to 23 after the closure of National Cement's Karachi unit. Out of these, 2

units produce white cement; one slag cement and the remaining produce Ordinary

Portland Cement (OPC).



Cherat Cement located in Khayber Pakhtoon Khua has an installed capacity of 0.72

million tonnes per annum. Cherat was the first cement plant in the private sector to

commence commercial operations (1985) after the end of state monopoly. Its main

markets are KPK and upper Punjab. The company is owned by Ghulam Faruque

group which also owns Cherat Papersacks.

The company has recently doubled its capacity and expansion has come at an

appropriate time. It is in a position to take advantage of the 'cement hungry northern

region' for capacity utilization. Expansion also provides potential of achieving

economies of scale. Given Cherat's established market base it could be the immediate

beneficiary if export of cement to Afghanistan is allowed — the country needing

massive reconstruction after devastation of a long war.

However, commencement of commercial production by Lucky and Army Welfare

plants may create over-supply even in the Northen region. Cherat will have to spend

more on transportation cost as it will have to tap distant markets to sell production

from expanded capacity. Constant increase in fuel prices will add to total

transportation expenses of the company in a substantial way — currently the freight

cost comes to more than 20% of retail prices of cement.

D.G. Khan Cement was the most prized unit out of the cement units privatized by the

Nawaz Sharif government. Of all the plants owned by the SCCP it was the most

modern plant with bulk of depreciation amortized and interest charges paid for. The

company enjoys a virtual monopoly in its sales territory. There is no other cement

plant within a radius of 400 kilometers. The current capacity of 720,000 tonnes per

annum (TPA) is being enhanced to 1.809 million tonnes at a cost of Rs. 6 billion. The

IFC is also participating in the project with a loan component of US$ 65 million and

equity worth US$ 5 million.

The expansion will come on line at a time when there will be supply overhang in the

industry. With margins coming under pressure it will have to bear the added brunt of

higher financial charges and increased depreciation cost in the years to come.

Analysis of the latest half-yearly results of the company shows that although sales of

the company have gone up by 3.5%, the increase in cost of sales has reduced gross

margin from 61% to 48%. With rising inputs cost not being matched by similar

increase in price of cement, margins are expected to shrink further. The company,

after the expansion is expected to face fiercer competition from Zeal Pak, Pioneer,



Dandot and Wah. To wrest market share from the competitors, it is likely that D.G.

Khan will have to reduce its cement prices.

Dandot Cement, privatised in 1992, was able to wipe off its accumulated losses by the

end of its first financial year after privatization. Dandot has increased the plant

capacity from 1000 tonnes to 1600 tonnes per day, through an optimization

programme completed in July1995.

The Chakwal Group, which acquired management control of Dandot Cement, is

setting up another cement plant, Chakwal Cement — the largest cement plant in the

country. This will give the Group control over 2.3 tonnes per annum production. The

decision to set up another plant in the same vicinity could go both ways. On the

positive side it could provide leverage to out-price competitors especially as the

industry moves towards a possible over-supply situation. Chakwal Cement is located

close by a motorway to be constructed which provides it an opportunity to market its

cement in large quantities to the project.

On the negative side, Dandot is a highly unionized concern and suffers from a

strained labor-management relationship which has led to plant closure in the past. In

addition, the investors are losing confidence in the Group mainly due to delayed

commencement of its much-talked about Dhan Fibres project.



Chapter 3: Lafarge Cement

3.0 Introduction to Lafarge Cement

3.1 Overview

Lafarge is a French industrial company in North America it is the largest diversified

supplier of construction materials in the U.S. and Canada it specializes in four major

products:

Cement

Construction aggregates

Concrete

Gypsum wallboard

Lafarge was found in 1833 by Joseph Auguste Pavin in Le Teil to exploit the

limestone quarry in Mont Saint Victor. In 1851 Lafarge signed its first international

contract for the delivery of 110,000 tonnes of lime to Suez Canal construction project.

It developed calcium alluminate cements. It was also an early pioneer in the

production of White Portland cement which is still made at the Le Teil plant of the

company. In 1991, a public company was formed and named as “Societe anonyme

des chaux et ciments de Lafarge et du Teil”.

In 1980, it joined with Belgian coal, coke and Fertilizer Company “Coppee” to

become SA Lafarge Coppee.

Later on Lafarge purchased a plant from the National Gypsum Company in early

1987 and after 10 years it also bought Redland plc, a leading British quarry operator.

By 2001 Lafarge became the world’s second largest cement manufacturer and

acquired Blue Circle Industries which initially was the world’s sixth largest cement

manufacturer to become the world leader in cement manufacturing.

By the year 2006, Lafarge North America (LNA) shareholders accepted a $3 billion

tender offer from Lafarge Group which gave full control over North American

business to the parent company removing LNA from the New York Stock Exchange.

Previously the Group had owned 52% of LNA shares.

In 2007 they divested their roofing division, selling it to a private equity group in a

deal that resulted Lafarge retaining a 35% equity stake. By December Lafarge

announced the purchase of the Orascin Cemenet Group, an Egyptian based cement

producer with the operations across Africa and Middle East. On may 15, 2008

Lafarge acquired Larsen & Toubro Ready Mix Concrete (RMC) business in India for



$349 million. By 2010 it tried its best to strengthen its presence in Brazil and in

Central Europe.

3.2 Lafarge Pakistan 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 tonnes, 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 tonnes, 2 tonnes jumbo bags and bulk carriers. The advanced plant

laboratory is the most sophisticated in the industry and ensures consistent high quality

of cement.

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.

Vision

“Strive to exceed the expectations of our stakeholders through sustainable growth and

high quality performance.”

Mission

“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.”

3.3 Analysis of Mission Statement



Customer Concern

The mission statement of Lafarge Cement shows that they consider their

customers important. According to the mission statement they want to provide

outstanding value to their customers in order to satisfy their needs and

maintain healthy relationship.

Concern for Employees

Lafarge’s mission statement shows clearly that they are concerned about their

employees. They are serious about the environment in which their employees

work. They focus upon providing a safe and stimulating work environment to

their personnel which could motivate them and provide them a surrounding in

which they can work efficiently.

Concern for Survival, Growth and Profitability

Lafarge’s concern for growth and profitability can be analyzed through the

statement that they want to give superior returns to their shareholders which

means they are focused upon their profit margins



Chapter 4: Financials

4.0 Comparative Financial Ratio Analysis

Lafarge Cement

Financial ratio analysis plays an important role in determining the strengths

and weaknesses of the company. Therefore financial statements of Lafarge

Cements are analyzed for the year 2006-2009 and following inferences are

made.

1. Profitability Ratios

2006 2007 2008 2009

Gross Profit Margin -160.1% -12% 8% 12%

Operating profit Margin -340.1% -19.49% 0.893% -.29%

Net Profit Margin -143.15% -12% -17% -16%

Return on Assets -0.21 -2.90 -5.65 -6.49

Lafarge Cement witnessed negative numbers in almost all of its profitability ratios. In

2006 its profitability was severely affected with Gross profit margin of -160.1%,

Operating profit margin -340.1% and Net Profit being -143.15%. Though in 20 07 the

negative ratios were improved and minimized but still the company had falling Net

Profit Margins in all of the 4 years which deteriorated it overall performance. In 20 08

Gross profit margin was 8% and Operating profit Margin of 0.893%, net profit margin

fell because of the hefty finance cost that the company had to bear for their debt. In 20

09, the company improved its trend of Gross profit margin that is 12% to 8% in 20 08.

However further analysis shows that the decline in Net profit was because of High

administrative expenses and lower other income. Administrative expenses were high

due to Royalty fee amounting to Rs. 2 billion. However Other income decreased due

to lower mark up on advances, which has reduced due to the loosening of the

monetary policy by SBP. Moreover negative numbers of ROA and ROE continuously

prevailed from 20 06 to 20 09 which means that the company was not efficiently

using its assets to generate earnings.



2. Liquidity Ratios

2006 2007 2008 2009

Working Capital (2,913,340) (269,382) (1,412,450) (4,719,592)

Current Ratio 0.21 0.91 0.73 0.31

Quick Ratio 0.16 0.8 0.55 0.21

In 2006, Lafarge Cement Current ratio and Quick ratio were quite low at 0.21 and

0.61. In 2007 the Current ratio peaked at 0.91 and the Quick ratio at 0.75. The

company again had a deteriorating liquidity condition as the Current ratio and Quick

ratio decreased in 2009. The Current Ratio fell to 0.31x from 0.73x in 2008 and the

quick ratio followed a similar trend plunged to 0.21x from 0.55x in 2008. The

condition was due to decrease in Current assets and increase in Current liabilities.

3. Activity Ratios

(In Days) 2006 2007 2008 2009

R'ables Turnover 3.53 3.23 2.65 2.48

P'ables Turnover 54.36 57.37 26.46 57.07

Stock Turnover 194.76 84.7 145.06 128.93

4. Leverage Ratios

2006 2007 2008 2009

Debt Ratio 0.50 0.33 0.37 0.34

Debt to Equity Ratio 1.37 0.67 0.70 0.69

The Gearing ratios of Lafarge cements have varied throughout the years. It shows that

in 20 06 the company had more emphasis on Long term debt as its Debt to asset ratio

was 0.50 whereas the debt to equity ratio and Long term debt to equity ratio was 1.37

and 1.09. In 20 09 the conditions improved as the company made the re payment of its

loans within a years’ time. This was also reflective in its Debt to equity ratio which

fell from 1.37 xs to 0.67.

In the year 2008, Lafarge leverage ratios further deteriorated as the debt to Asset ratio

and debt to equity ratio increased. This was because of the short term running finance



that increased the debt of the company to Rs 2.4 billion. Whereas long term debt to

equity ratio improved by decreasing to 0.40.

Year 2009 highlights reduced leverage position of the company as it has retired most

of its long term debt and secure short term financing. The debt included long term

loans acquired through a syndicate of local banks and also Liabilities subject to

Financial Lease. The company has repaid the entire amount outstanding with respect

to Financial Lease and acquired assets at the end of the term. The other long term loan

is re being repaid on bi annual basis which was acquired in March 2008 for capital

expenditure purposes. The repayment has been relaxed due to the loosening of the key

rate policy which has affected the KIBOR rate. The Debt to asset ratio reduced to 0.34

and similarly Debt to equity ratio also reduced to 0.69.

DG Khan Cement

Financial ratios of D G Khan Cements are analyzed for the year 2006-2009

and following conclusion are drawn:

Profitability Ratios

2006 2007 2008 2009

Gross Profit Margin 49.81% 31.65% 15% 31%

Net Profit Margin 30.40% 25.27% (0.43%) 2.91%

Return on Assets 7.05% 3.14% -0.10% 1.23%

Return on Equity 12.55% 4.78% -0.18% 2.51%

The profitability ratios of the company have shown a declining trend since after 2006.

The gross profit margin decreased in 2007 and 2008. The profit margin of the

company has decreased continuously along with return on assets (ROA) and return on

equity (ROE) in 2007 & 2008 and again started to rise in 2009. The profit after

taxation had declined by 33% in 2007 due to lower net retention prices caused by a

supply overhang in the overall industry. Also the problem of rising input costs had

begun in 2007. This rise in cost of production and raw material had continued into

2008. However in 2009, the boost in export sales lead to an increase in the profit after

tax and the profit margin was 2.91%. The operating expenses had also increased due

to higher selling and distribution expenses but the increased sales revenue contributed

to an increase in PAT.



Increased production facilitated higher sales volume which in turn translated into

almost doubling of sales revenue in 2008. The company had earned the highest sales

revenue of Rs 12.445 billion in 2008. However, despite this, the gross profit of DGKC

in 2008 was around 6% lower than the gross profit posted in 2007. The reason for

lower gross profit was a 140% increase in the cost of sales during the fiscal year 2008.

However in 2009, major distribution costs increased when exports increased. Also

finance charges rose due to higher interest rates and increased long-term borrowing.

But the sales revenue had increased by 45% improving the profitability of DGKC and

resulted in a profit after taxation of Rs 525.581 million in 2009 against a loss after

taxation of Rs 53.23 million in 2008.

1. Liquidity Ratios

2006 2007 2008 2009

Working Capital 3894459 11824725 7147873 (2547207)

Current Ratio 1.65 2.60 1.59 0.84

Quick Ratio 1.60 2.56 1.56 0.78

The liquidity position of DGKC worsened in 2009 by due to a decrease in current

ratio and working capital. It’s liquidity stance had been strengthening in 2006 and

2007 and its liquidity position was the most favorable. The increase in current assets

had brought about this change. There was a 98% increase in short-term investments.

Furthermore, the cash and bank balances had also risen considerably. In 2008 the

current assets of the company declined slightly but a 63% rise in current liabilities

caused a decrease in the liquidity of the company. Investments constitute nearly 79%

of the company's total current assets and they declined by 11% in 2008. The

investments decreased further from Rs 15 billion at year end 2008 to Rs 7 billion by

end of 2009 which caused a stress on all liquidity ratios.

2. Activity Ratios

(In Days) 2006 2007 2008 2009

Receivable Turnover 10.2 8.20 10.74 10.4

Payable Turnover 117.06 85.46 47.5 42.4

Stock Turnover 14.95 24.55 15.45 26.6



The performance of DGKC in terms of asset management was weak during 2007.

During the year, the inventory turnover (days) of the company more than doubled

compared to 2006 when the management of inventory seemed most efficient (evident

from the lowest inventory turnover in days). The increase in inventory turnover in

days and Days sales outstanding (DSO) prolonged the operating cycle of the company

in 2007. In 2008 the days to convert inventory into sales became 47.5. Although the

days to convert sales into cash (DSO) increased slightly, the substantial decrease in

ITO (days) led to the shortening of the operating cycle in 2008. Besides this the sales

to equity and total asset turnover of the company which had a rising trend till 2009.

From 2007 to 2009, the sales to equity ratio increased due to increase in sales revenue

from exports sales.

3. Leverage Ratios

2006 2007 2008 2009

Debt Ratio 0.44 0.34 0.42 0.51

Debt to Equity Ratio 48 : 52 44 : 56 45 : 55 27:73

The debt management ratios of DGKC rose from 2007 to 2009. During 2008 the debt

ratios of the company rose because the total debt increased in 2008 mainly due to a

63% increase in the current liabilities however long term debt decreased. The long

term debt to equity increased because of a decline in the equity base due to fall in

reserves.

4. Growth Ratios

2006 2007 2008 2009

EPS 10.37 6.43 (0.21) 1.63

Due to reduced sales revenue and in turn the profitability, DGKC experienced a

decrease in its Earning per Share (EPS) and Price to Earning (P/E) Ratio. EPS fell

from Rs 10.37 in 2006 to Rs 1.63 in 2009.The averaged share price fell from Rs 87.85

in 2006 Rs 37 to2009. This shows that the lower profits of the company have started

reflecting in the low investor confidence and falling share price.

Lucky Cement

The profits of Lucky Cement have been increasing since 2003, however, at

varying rates. The growth in profits had been declining from 2006 to 2008 due



to rising costs but surged during 2009. During 2008, the growth of the

company's profits slowed down to 5%.


2006 2007 2008 2009

Gross Profit Margin 37.00% 36.4356% 31.5239% 41.3563%

Net Profit Margin 24.04% 20.34% 15.79% 17.46%

Return on Asset 10.08% 10.32% 8.93% 12.66%

Return on Equity 31.73% 31.02% 19.12% 21.94%

The gross profit margin of the company increased to 41.37 during 2009 from 31.52%

in 2008. This shows that the profitability of the company has improved during 2009.

The gross margin showed a rising trend in 2009, primarily due to the increasing

export demands. Net margin showed a slight increase as finance charges drastically

increased to Rs 1237m from Rs 127 million representing a rise of 881%, as the

company was wound up in cross currency swap transactions which were providing

interest rates hedging and SBP had also increased its markup rate- hence a higher

financing cost.

2. Activity Ratios

(In Days) 2006 2007 2008 2009


Payable Turnover 29.1 30.7 42 35.7

Stocks Turnover 96.3 90.1 109.2 104.7

The trade cycle of Lucky Cement became 105.5 days in 2009 as opposed to 116.3

days during 2008. However during 2009, it took Lucky Cement 104 days to sell its

inventory as compared to 90.1 days during 2007. This is because the stock of the

company increased while the sales reduced. Also, the Day sales outstanding went

from 27.6 days to 49.1 days during 2008 and 36.5 in 2009, depicting that it took the

company greater period of time to recover credit payments in 2008 but got better in

2009.

The Total Asset Turnover ratio of the company had a declining trend till 2005, after

which it started improving. The ratio continued to improve during 2009. The total

asset turnover ratio had been increasing due to higher growth in sales revenue as



compared to the growth in assets over the years till 2009 but then it slightly decreased

due to lesser selling price despite high sale volume.

3. Liquidity Ratios

2006 2007 2008 2009

Working Capital 296550 949880 720480 1240740

Current Ratio 0.33 0.54 0.70 1.35

Quick Ratio 0.58 0.43 0.46 0.36

The liquidity position of the company became favorable during 2009 as the current

ratio rise from 0.70 in 2008 to 1.35 in 2009. Lucky Cement had shown a positive

trend in 2009. The current assets were raised by cash in hand due to a smaller Days

Sale Outstanding time period and also sales tax refundable by the company. On the

other hand, current liabilities had increased, there were quite a few short-term

borrowings done by the company as financing facilities, along with many bills

payables. Liquidity position may remain weak until the company reduces its bills

payables and short-term borrowings.

4. Leverage Ratios

2006 2007 2008 2009

Debt Ratio 0.27 0.31 0.50 0.56

Debt to Equity Ratio 0.45 0.56 1.37 1.87

Lucky Cement has a strong position when it comes to leverage ratio. Since the end of

2006, the company has employed strict measures to keep its debts under control. This

futuristic preventive measure has helped the company a lot in these times when

interest rates are continuously on the rise. The action to reduce loans and to depend on

equity for expansionary purpose finances has been critical in saving the company

valuable profits that would have been otherwise lost in the name of finance costs. The

swap agreements are another preventive measure the company is employing to save

itself further from interest rates.

The results of the preventive measures are visible in the debt to asset ratio and debt to

equity ratio, which show a downward trend since 2006. Total debt to equity has also

been on a declining rate. In 2008, although the total debt increased significantly, due

to the rise in current liabilities, yet the overall effect has been declining. Recently cost



reduction measures like the Waste Heat Energy Project and using local coal has also

helped in reducing debt. Hence the debt to asset ratio signifies that the company

succeeded in lowering its overall debts and strengthening its financial position.

5. Growth Ratio

2006 2007 2008 2009

EPS 7.35 9.67 9.84 14.21

The earnings per share of the company had a general positive trend that has been

established since 2006. The earnings per share of Lucky Cement increased to Rs

14.21 in 2009 from Rs 9.84 in 2008. However, the price to earnings ratio rose during

2009, depicting high investor confidence in the company. The average market price of

the company's shares in 2008 was Rs 90.96, which declined to 56.83 during 2009.

Fauji Cement


2006 2007 2008 2009

Gross Profit Margin 51.12 31.52 18.56 31.75

Net Profit Margin 28.08 18.66 11.66 18.65

Return on Asset 19.38 10.26 4.39 5.94

Return on Equity 50.60 21.39 6.87 11.01

For 2009, Fauji Cement posted a profit after tax of Rs 1007.620 million, an increase

of 144% YoY (2008: Rs 413.6 million). This increase was due to high sales. The

company was able to employ efficiencies and cut costs such that production costs fell

despite inflationary pressures. Gross Profit thus stood at Rs 1687 million, as compared

to Rs 658.110 million at the end of 2009.

With the increase in sales revenue and the ongoing price war, profitability of the

company was seen to increase over 2009. The Gross profit margin for 2009 stood at

31.75% (2008: 18.56%), while the net profit margin stood at 18.65% (2008: 11.66%).

While the company's gross profit margin is similar to that of the industry, the net

profit margin stands well above the industry average which is only 1.4%.



2. Liquidity

2006 2007 2008 2009

Working Capital 312180 511240 2839320 (974000)

Current Ratio 1.25 1.35 2.16 0.63

Quick Ratio 0.74 0.90 1.69 0.18

The liquidity position of FCCL has been seen to be on a decline since 2009, when the

current ratio fell sharply from 2.16 at the end of 2008 to 0.63 at the end of 2009. The

liquidity position of the company is similar to that of the industry, which has an

average current ratio of 0.67.

Current liabilities rose by 52% YoY, standing at Rs 3.98 billion; while current assets

rose by 25% YoY to stand at Rs 2.1 billion. A large portion of the increase in current

liabilities is attributed to an increase in the current portion of long term financing.

Current assets on the other hand increased due to increases in sales tax refundable.

3. Activity Ratio

(In Days) 2006 2007 2008 2009


Payable Turnover - - - -

Stocks Turnover 91.42 98.84 112.80 116.07

Asset management, similar to the other ratios analyzed, has been on a decline during

2009. Inventory turnover rose from 112.80 days at the end of 2008 to 116.07 days by

the end of 2009, mainly due to the decline in sales over the period. Receivables

doubled, from 3 days at the end of 2008 to 6 days by the end of 2009. This is a great

achievement for FCCL, as it has made a considerable improvement in its debt

collection. The industry average for receivable days is 6 days, meaning the company

is doing much better than the industry.

4. Leverage Ratio

2006 2007 2008 2009

Debt ratio 0.36 0.28 0.19 0.34

Debt to Equity ratio 0.67 0.48 0.24 0.75



Debt management of FCCL has been on a decline, with short and long term debt on

the rise. The debt to assets ratio has seen a moderate rise, from 0.19 at the end of 2008

to 0.34 by the end of 2009. Debt to equity however rose to .75 in 2009 compared to

0.24 in 2008. While debt to assets rose only moderately due to the balance of

increasing assets and liabilities, the debt to equity ratio felt the full impact of the

increasing debt. The company's debt management is considerably worse than the

industry average, which has a debt to equity ratio of 1.3.

5. Growth Ratios

2006 2007 2008 2009

EPS 3.25 1.74 0.60 1.45

Earnings per share for the year stood at Rs 0.60 in 2008 and 1.45 in 2009. The

company's EPS stands well below the industry average of Rs 2 per share, and is a

reflection of the poor sales during the year. The price earnings ratio stands at 14.1 in

2009 which shows that investors are still confident about the company's prospects,

despite the company's performance. Book value remained stable over the year, as

there was no change in the number of shares outstanding or in equity. Like other

cement manufacturers, FCCL has not announced a dividend for its shareholders since

2007, and has chosen to reinvest profits so as to boost performance during the coming

year.



Chapter 5: Internal and External Analysis

5.0 Internal and External Analysis

5.1 SWOT Analysis

Strengths

1. Availability of Raw Material.

2. Imported Machinery and plants in most of the companies, which provide

better quality to over all process.

3. During fiscal year 2007-08, country exports stood at 7.712 million tonnes

($435 million) and Pakistan had already established its position as an exporter

of cement and clinker in the region. Sources said the industry projection

suggested that the cement industry exports would reach to $735 million by the

end of 2008-09 and it would touch $1.043 billion by the end of 2009-10.

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

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

5000Psi and 5950Psi 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

FY02 FY03 FY04 FY05 FY06E

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

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



10. Pakistan cement industry is one the largest exporter in Asia, major markets are

of Afghanistan and Iraq will be after peace. It’s 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.



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 when it comes to make a choice between the

different brands 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.

6. At Lafarge, sales decisions are centralized. As exports are only allowed to the

nearest regions the company is losing on the most significant market for

Pakistani cement; East Africa. On the other hand, Lucky Cement is exporting

to East Africa and other major markets such as Iran and Srilanka. Meanwhile,

Lafarge is exporting to India and Afghanistan and Middle East primarily.



7. Lafarge is primarily focusing on cost reduction strategies instead of increasing

sales volumes. Therefore, it is not as profitable as the other players in the

industry.

8. A major reason for increased costs is the administrative costs incurred by

Lafarge which is highest in the industry. This is because the location of the

plants is such that the employees have to be given security, free

accommodation, food and lodging.

9. Though the company has done debt restructuring but it is still making heavy

capital investments such as waste disposal system which is adding to the costs.

10. Another reason for increased costs is that the company invests a lot in stocks

and inventory.

11. The company was incurring heavy costs in terms of power and fuel. It was

earlier using gas for its operations, then shifted towards fuel and is now using

coal, which has reduced costs. However, only 25 – 30% of this coal is local,

rest is imported.

Threats

1. Consumption of cement linked with GDP growth rate and in 2009 GDP

started growing. Consumption of cement is directly linked with the increase

in GDP and 2007 onwards saw major decline in GDP so the positive trend

was anticipated this year as 2009 saw GDP rising and hence attributed to a

surge in the demand for cement. Nonetheless this was diluted by weak

demand on the international forefront as the sub prime crisis triggered global

phenomenon reduced expenditures and result in restructuring of major

economies across the globe.



2. Demand for cement is linked to public sector development by the

government and this has decreased. Demand is liked with the growth in

Public sector development projects (PSDP)and incase of Pakistan now the

PSDP is falling is falling and over the years in case of Pakistan this has

grown but failed to translate into actual increase in demand for cement.

3. Demand supply situation is cyclical and changes periodically. After every

three to four years, a round of expansions raises the supply In excess of

demand. Demand eventually rises to close the gap and a fresh round of

expansions start. In 2006 the industry reached its capacity and this resulted

in a fresh round of investments to increase capacity and resulted in

development projects that spanned over two to three years to increase

capacity and this resulted in 20109 in a scenario as depicted by the graphs

below that industry capacity is increasing and the utilization is low.


Production and Capacity Utilization gap

05

101520253035404550

1990

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Years

Cap

acity Production Capacity

Capacity Utilization


4. Despite collusion for combined marketing efforts any attempt to collude to

ensure a stable price enough to cover costs is hindered. Collusion always

results in a breakdown as the violation of the resultant quota is done by a

few player like DGKC did in 2007 to gain volume share in market and thus

resulting in prices not sustain and the cartel breaking down and DGKC

undercut prices to offload its excess production capacity and the industry

was in a position that there was excess capacity.

5. Herfindahl Index of 7 and $- Firm ratio of the industry stands at 40%

suggests that margers and acquistions would be the way forward.Mergers

and Acquistions would result as there was spare capacity the only way to

close the gap was to export and with 80% of the firms concentratined in the

south region of the country (punjab and NWFP) these north cemnet

producers would need to establish a presence in the south (sindh and

Balochistan region) to go about actually being able to access the sea rourte

to export to Middle East, Africa etc and this would result in high osts

associated with estavblishinga presnece in both regions leading to futher

leverage an already highly leveraged Industry.



6. An unexpected slump in international markets triggered by the global

economy shrinking as a result of the sub prime crises led to cement demand

falling.

7. Main cost of the plants is the cost of fuel and any impact on the cost of fuel

would seriously endager the bottom line.

Fuel costs were up throughout the period stretching 2006 onwards as a result

of the surge in international prices of coal which started rising enormously in

23008 and crippled the industry bottom line completely and tehse prices

started taking a hike downwards from the second half of 2009 and the industry

had a room foir nbretahing and this reusltnalty would lead to lower frieght

costs as proces of fuel would come down and raise Earnings before

interest,tax, depreciation and Ammortization (EBITDA)of the company. A

sharp rupee deprectaiton in the value of the rupee by 28% would offset the

drop in fuel costs and not result in the bottom line improving as a result of

decreased fuel costs.

8. Reduction in the cost of crude ioil would however reduce the cost of local

pertol and diesel and thus result in a reduction in packaging cost and cost of

freight.

9. Demand less than capacity and varies cyclically. Historically Pakistan has

produced less cement than its installed capacity depriving the industry

players the opporunity to benefit form economies of scale

10. Price wars could have a crippling impact on an already highly leveraged

industry which may go for losses due to high fioxed costs associated with

the debt

11. Oligopolistic structure of the industry. The product is homogenous and the

large no of sellers so no opportunity for any one player to exploit and play

with the pricing and there is no single dominant industry leader and a few

large players are deemed to be price setters.

12. Current phase is one of a widening gap from 2007 to 2010. Maple leaf and,

DG Khan Cement, Gharibwal and Kohat cement have made major

enhancement in production capacity in the year 2010 and this would mean

that again in 2010 the industry would be in a phase where there would be



excess capacity and the focus would have to be on export markets as

domestic demand would not rise at the same pace as the increase in capacity.

13. The cement sector is regulated by four different authorities namely

Securities and Exchange commission of Pakistan (SECP), Ministry of

Industries and Production. Apart from this there are two other also namely

All Pakistan Cement Manufacturers Association and Association of Builders

and Developers (ABAD) hence the industry is complex in terms of the

regulatory bodies involved and each body has its own set of vested interests

from a regulatory perspective that are divergent form the others. Like for

example the APCMA which includes top management of major cement

producer’s sets prices and quota for each participant in the cement sector

where as ABAD comprises of cement end users, mainly large builders that

would not want the price to rise and raise hue and cry on price rises. So the

objectives of all these different regulators are different which adds to the

complexity of the pricing in the industry.

14. Market saturation that led to price wars damages the industry which is

largely operating beyond capacity and in the pipeline many companies have

projects that were started around 2006 and were operational around 2009

adding to the gap between demand and supply and hence consequently with

the product being homogenous they started to cut prices and even some large

players cut prices from Rs. 340 per bag to Rs. 300, something small cement

manufacturers couldn’t counter due to their high cost structure and no

cushion for reduced selling price in the cost structure.



15. 4 firm concentration ratios of 40% reflect the fact that a few large players

have large volume of sales and highlight the issues facing the firm. Low

concentration n in the industry justifies Consolidation of players.

16. Cement Consumption correlated with the Economic growth and due to

global recession the industry is facing curtailment in demand.

17. Big players who are part of APCMA through consensus set the prices and

allocate quota for each company

18. Per capita cement consumption has low room for further penetration and

hence demand will not grow in the imminent future and remain stagnant or

grow by a negligible percentage.

19. Effect of Dam construction on cement demand is exaggerated. In the period

2006 onwards some major dams are being constructed but these

development projects consume around 5mn MT and are spread over four to

five years and so would add only 5% to each year’s total demand which is

not a sizeable achievement and would mean a growth in demand of just 1mn

Mt per year and even if two three dam making projects start simultaneously

then also the demand of overall industry would rise by around 10% which

leads to the fact that the statement that building dams results in increased

demand for cement is an understatement. The plans of dam building are

highlighted in the table below. It must be kept in mind that this is the

planned implementation but a lot of political and locality related issues arise

when Dam construction is brought up for discussion and so this hampers the

actual timely implementation of these projects and the table is just an

estimate that serves as the future dam building road map an could be

different from the reality. Also the benefit form dams are limited only to a

few cement manufacturers who are located in the areas near to the dam as

highlighted by the table below.



20. Exports through land concentrated in Afghanistan and in the years to come

this will largely depend on the political situation of Afghanistan a factor that

is not firm specific and not in control of the companies and so this land

based export could get affected any time if the political and law and order

situation n Afghanistan is affected.

21. Export through sea route is constrained by the lack of BOT handling

Facilities at the sea port and the BOT terminal located at the Karachi port

has a capacity of around 1Mn Mt per year an and so this constrains the

export from sea.

22. Cost of manufacturing includes Manufacturing cost, Administrative cost and

selling cost. Manufacturing cost is significantly being impacted by the fact

that the cement industry is highly leveraged and the fact that the fuel costs

associated with coal. Furnace based processes have risen drastically up to

2009 and only in second half of 2009 have prices of coal started to reduce

and thus give a breather to the companies in terms of increased profitability.

Distribution costs are affected by the fact that most of the plants are locate in

the North of Pakistan i.e. Punjab and NWFP as opposed to south i.e. Sindh

and Balochistan and hence transportation costs are high and they cannot

export as they have no access to sea routes



From the graph above it can be noticed that fuel cots are the major cost driers

for this sector and slight volatility in prices of coal/ crude oil can have

crushing effect on the bottom line of the company

23. Strategic presence in both South and North region is the key to success so as

to be able to cater to local high sales in the North and cater to exports via the

sea through South region presence.

24. Pakistan cement manufacturers are highly geared and a slight decrease in

cots would lead to the bottom line toppling and tilting towards heavy losses.

25. Soaring and ever increasing 6 month KIBOR based interest rates depleting

the bottom line of the industry.

26. Price hike of Rs. 40/ Rs. 45 as a result of the rising fuel costs would impact

sales drastically.

27. local demand is falling due to inflationary pressures, cost of fuel rising and

almost negligible amount of public sector development projects in 2010 and

this has resulted in cement manufacturers resorting to keeping the price fixed

at Rs. 330/ bag and African coal prices averaged USD 125 MT versus last

years USD 73 MT.

28. Unanticipated increase in interest rates or less than expected demand growth

might create severe crises for the sector couple of years forward

29. 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.



30. A price war was witnessed which ended up with no conqueror. Similar

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.

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.



36. IMF Package in Future can cause to decrease GDP and economical

development in Pakistan, which will also be the reason to stop development

of infrastructure. So it will have huge effect on cement industry also.

Opportunities

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 tonnes 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

tonnes of cement annually.

4. New export markets. Production less than industry capacity historically and

hece as a result of this it was felt that there was a potential to go for exports to

Africa, India, Afhanistan and Iraq. Middle eats ad fafrican markets are

untapped and haveno cemnat production capacity due to low level of

investment in those countries in cement sector.

5. Capacity Utilization in the sector remians low and the industry has averaged at

80% during 9 months ending Fy 09 aon the back of rising cement prices



localyy and regionaly and this indicate dthe fact that the cmeent supply is

steady and the maunufacturers have not resorted to creatung an artificial

shortage.

6. Expand capacity production asnd exoansion wll lead to incraesing the total

capacity and will boost production, thus leading to surge in sales revenue

through voumetric growth and in 2009 after a dismisal local demand cement

prices have reduced and large players having the ability have lowered prices

and have gobe for volumes and and export markets have been stagnant in

terms of sleas so an opportunity arose for volum egroth through price cuts

which was effectively capitalizeed on by large player trough reduction in the

prricing of cement.

7. Diversify your product line and go for value added products to capture new

market segments. Differentitation could be achieved in the local scenario

where cemnet being sold by all players is relatively same by going for

products like Ready Mix customeized cement as per user needs for cosntructio

projects and going for forwrad integration / alliance with large ocnstruiction

companies like Paragon and FVG to gain their share of the cement market

purchase.

8. Large players who have no presnce in the North and not I the souththe South

region should focus on establishing a presnec ein both the regions as as to be

able to capitalize on high local sales in the north and export potential through

sea in the South. Move to setup palntys in the south as opoopsed to the North

is the appropriate startegy as most plants atht are located in the north and north

has 75-80% of the total production capacity and demand is les stahn

production capacitya nd the spare caapacirty cannpt be utilized for exporting

since high transport cost hinders transport to sea port for exports to Africa,

India, Afghanistan and Iraq.



9. Hege against interest rate risk associated with the LIBOR based financning as

opposed to 6 onths KIBOR based borrowing as the Kibor is rising so lior

should be preffered for borrowing to reduce financial costs.

10. Establish BOT facility itself at the port so as to meet exportdemand

11. Expand production capacity and reach. Lower selling and distrubution cost by

having a plant in both north and south.

12. Procure coal and hedge gaainst the adverse impacts of fuel cost fluctuations by

going for futures of coaland oil or store stock of coal adequate for a

considerable justified time to avoid ris of adverse price movements that raise

the compansy cost of production.

13. Go for cost saving measures like waste heat recovery projects that add

significantly to cost cutting.

14. Huge export potential to UAE, Dubai, Kuwait, Iraq, Qatar, Djibouti,

Afghanistan, South Africa, india and Srilanka

15. Supply deficiency in India and China that we can capitalize on government

incentive to import plant and machinery at lower cost via SBP LTFF scheme

16. Depreciation of currency and deregulation by WTO make Pakistan a cheap

manufacturer of cement

17. Pakistan is 5th largest exporter of cement in the world

18. Records PSDP of Rs. 621 Bn and reduction in exercise duty by Rs. 10/ bag

and declining interest rate scenario

19. Local demand will be high due to reconstruction activation of devastated

homes, shops, and schools through out the country due to flood impact.



5.2 PEST Analysis

Political

Pakistan has unbalanced government policies. India had been deliberately

avoiding import of good quality Pakistani cement. Increased exports might

salvage some 7.8 closed cement plants and save many others, which were near

to closure.

The Pakistan military is using heavy weapons to combat an extremist network

located in north-west Pakistan. Until the government eliminates this insurgence,

political instability will be the key political obstacle, which includes the

displacing of millions of civilians.

Corruption is reportedly widespread among Pakistan’s government officials.

The legal system is also considered corrupt and inefficient.

Supreme Court (SC)’s unanimous decision of declaring NRO void ab initio has

added further uncertainty to the political climate. All cases and convictions that

had been set aside under the NRO stand revived now.

On the security front, army operation against militants in South Waziristan is on

track with some tangible results expected over the next 6-12 months. A fall out

of the above is increase in desperate terrorist attacks meant to demoralize public.

However, steady progress on war on terror (either military or diplomatic) should

lead to gradual improvement in law and order situation.

The price of cement is primarily controlled by the coal rates, power tariffs,

railway tariffs, freight, royalty and cess on limestone. Interestingly, government

controls all of these prices. Government is also one of the biggest consumers of

the cement in the country. Most state governments, in order to attract

investments in their respective states, offer fiscal incentives in the form of sales

tax exemptions/deferrals.

Govt. should apply sustainable policies for the beneficial of the exporters as well

as the investors.

Economic

Pakistan is itself the site of military and terrorist activity associated with the

Taliban as recently as 2009 and early 2010. Its fundamental lack of political

stability is a challenge to its economic and financial outlook.



Regional instability and domestic bureaucratic inadequacies challenge this

economy that, though recently liberalized by the government, supports a

relatively low income population.

CPI inflation (YoY) hit a trough of 8.9% in October CY09 vs. 25.0% a year ago.

However, due to reversal of base effect and some uptick in fuel and food prices,

headline inflation has increased to 10.5% in December.

After recent increase in electricity and gas tariffs, there is an expected rise in

inflation over the next two months before CPI numbers begin their downward

course again. While core inflation, which excludes volatile food and energy

prices, has continued to drift lower. For full fiscal year FY10, there is an

expected headline inflation to come at 11.0% vs. 20.8% in FY09. Abatement in

demand led inflation has allowed SBP to slash its policy rate by 250bps to

12.5%.We foresee another 100bps cut in discount rate in 4QFY10.

With macroeconomic policies remaining partly biased towards consolidation and

power supply constraints persisting, we expect FY10 GDP growth to remain

below trend, though slightly improving to 3.0% from 2.0% last year due to

industrial growth turning positive (FY09 growth -3.3%).

In addition to the need to eliminate terrorist violence in Pakistan, the government

must continue to work to strengthen the legal system and transparency in

government to increase growth in Pakistan’s economy and industry.

Growth has continued to be positive despite global economic slowdown, but not

high enough to seriously challenge poverty levels in the country, where GDP per

capita average remains just over USD 1000.

There is a reliance on external aid from the international community, but

underlying contingencies in that lending, which are connected with the

government’s stance towards militants, continually threaten expectations for

future aid.

With the help of the International Monetary Fund, the Pakistan government

managed to control inflation which had risen above 20% in 2008 and averaged

13.6% in 2009. In 2010, the government is attempting structural reforms to

make way for future economic growth. However, the government is finding it

challenging to meet the fiscal deficit target as tax revenue is below target. This

may force further fiscal tightening.



The cement is contributing Rs 30 billion to the national exchequer in the form of

tax. This sector has invested about Rs 100 billion in capacity expansion over the

last four years.

In budget 2008-2009 the federal excise duty on cement has been increased to Rs.

900 per tonnes from the existing base of Rs. 750 per tonnes.

In recent years, the Cement Industry of Pakistan has witnessed an unprecedented

growth of 32% year-to-year basis. Industry has an installed Cement production

of about 37 million tonnes per annum, over stripping domestic demand.

Globally, construction and engineering services industry is regarded as one of the

largest fragmented industry accounting for 10-12% of GDP in many countries.

Benefiting from both public and private investments, the construction industry is

a prime source of employment generation offering job opportunities to millions

of unskilled, semi-skilled and skilled work force. The total world spending on

construction amounted to US$3.2 trillion in 1998.

Socio-Culture

The change in the lifestyle of the people affects the growing demand for different

products and services. The change in the lifestyle and needs in different

demographics also affect the demand of the customers.

Usually, the cement industry in Pakistan consists of both the organized sector and

the unorganized sector. Organized sector comprises of the well-known cement

manufacturing companies while the main players of the unorganized sector are

the regional and local cement-producing units in various states across the state.

Most of the times the consumers prefer to buy cement which stands like a brand

in the market. The brands with small cement plants, low brand value and image

are not able to survive against the cement giants. And with the increasing

population it is also expected that cement industry will create more jobs in the

coming years.

According to estimates of construction industry, there is a huge backlog of about

6.25 million housing units in the country. Bulk of the current demand of 0.6

million units needed every year is for urban areas. With greater urbanization the

demand for cement is expected to grow at an average of nearly 7% per annum.

Pakistan has one of the highest population growth rates in the world, touching

3%. This has prompted a sizable demand for housing facilities in the country.



The demand for cement for infrastructure units is expected to grow with the

commencement of work on motorways, power plants, and Islamabad New City,

Karachi Package and Ghazi Brotha dam. If all these projects are implemented as

per schedule, the demand for cement is expected to grow at a higher rate.

Currently, the industry is on the boom, with a lot of government infrastructure

and housing projects under construction. In spite of seeing a fall during 2008-09,

the export segment of the industry is expected to grow again on account of

various infrastructure projects that are being taken up all over the world and

numerous outstanding cement plants coming up in near future in the country.

The construction sector in Pakistan has played an important role in providing

jobs and revival of economy. It provides jobs to about 7 per cent of the total

employed labor force or to 2.5 million persons, during 1999-2000

The main factors behind increase in demand of cement were: 60 percent higher

Public Sector Development Projects (PSDP) allocation, seven percent GDP

growth, increasing number of real estate development projects for commercial

and residential use, developing export market and expected construction of

mega dams.

This rising trend in construction and cement industry is expected to be short-lived

due to higher interest rates and inflationary concerns are likely to make it

disadvantageous for investors to enter the construction industry. In addition to

this, to control real estate prices the government is considering imposing a tax

on it.

The surplus Cement has an encouraging export market demand from neighboring

countries like India and Afghanistan and there is great potential to export the

surplus cement to the Middle East. Realizing the rapid development in the

construction industry

Instead of providing any relief in the budget, the sector was further penalized

with a 3% increase in sale tax to 18%. So far, the manufacturers have been able

to pass on the increase to consumers but the situation is unlikely to continue.

However, the possibility of formation of a cartel cannot be ruled out. Since

massive investment has been made in the sector, any reduction in price of

cement can reduce profit margin of all the units.



Formation of cartel and fixation of price at a level high enough to cover

increasing cost of inputs and ensure reasonable profit margin may provide short-

term relief to the manufactures. Such a cartel may be against the interest of

consumer but can help the manufacturer to survive with some dignity.

Formation and smooth operation of a cartel is generally difficult but in the case

of cement industry it may not so because the only restriction could be on the

level of capacity utilization along with a modest uniform reduction in the price

of cement. However, the units are in the diverse state of financial health, enjoy

different level of competitive advantage, and therefore need different

prescriptions to maintain their profitability.

Technological Factor

Technological advancement in all the sectors of the country has changed the

entire socio-economic environment.

From mining to production the entire process depends on technology. The

Government of Pakistan should plan to study and possibly acquire new

technologies from the cement industry of advanced foreign countries in order to

make our own cement industry efficient and effective.

Many industries in Pakistan have old machinery, which is a major cause of

energy loss in our industries. The boilers in our industries are very old and waste

precious energy. Most of them are without any instruments to control burning.

Therefore inefficient combustion remains undetected.

Pakistan like other many developing countries did not participate in the wave of

energy efficiency investment that occurred (mostly in OECD countries) after the

oil price shocks of the 1970s and 1980s.

Even more recently, due to financial and technical constraints, industries have

installed inefficient equipments and machinery. As a result, Pakistan has one of

the highest energy intensity ratios in the world – more than 5 times than Japan

(Asian Development Bank, 2005). Highly inefficient energy usage and increased

industrial activities are some of the major causes of deterioration of ambient air

quality in Pakistan

Technology or knowledge transfer under CDM Construction Design and

Management Regulation can help business in developing countries to improve

their performance.



In Pakistan cement industries can benefit from the use of alternate derived fuels

such as used oils, spent solvents, used tyres, palletized sewage sludge, meat and

bone meal, packaging and refuse derived fuel. There are two main benefits that

can achieved from this are; firstly the use of fossil fuel will be avoided; and

secondly it will help in solving the problem of waste disposal as well. Given the

high kiln temperature, there is also the chance to burn special wastes.

The implementation of Cogeneration (called combined heat and power process)

which can be used in any medium to large sized industrial plant which uses both

heat and electricity for their processes can use cogeneration to improve their

energy efficiency by up to 30 percent. It is a highly fuel-efficient technology

that uses the heat - produced as a by-product of energy generation - that would

normally be wasted to the environment. Cogeneration plants as bagasse is

considered carbon neutral.

5.3 Porter’s Five Forces

1. Threats of Substitutes

There are no substitute products available to cement in the market. Cement is

used widely in the making of heavy infrastructure such as fly-over and under

passes which are the public sector’s investment, it is also used in the

construction of buildings and houses etc. There is no other option available to

the buyers if cement prices increases or if shortage of cement occurs.

Moreover, in foreign countries maximum houses are built of wood but here in

Pakistan only cement is used for the construction. Therefore, it is clear that

cement industry and its firms do not face the threat of substitutes.

To date, no real substitutes for cement exist.

Bitumen in roads and engineering plastic in building offer some element of

competition.

2. Bargaining Power of Customers

There is almost no bargaining power of customers when the cement industry is

considered. Cement is an inelastic product; if the prices of cement decreases



consumers will not start its heavy purchase, rather how much ever the cement

will be required for the construction or for any other reason consumers will

buy that much tonnes. Therefore, it is clear that consumers do not have

bargaining power in the cement industry.

The current shortage of cement in the regional markets and the large number

of building material dealers in the market weaken the negotiating position of

wholesale cement traders.

Buying power of consumers is high. This is the result of the increasing number

of independent firms and the pressure of consumer groups and the regulator.

Rising share of retail purchase and declining share of bulk purchasers

3. Threats of new entrants:

The threat of new entrants is very low and limited. It is not easy for people or

entrepreneurs to enter cement industry because it requires heavy investment

for starting a cement business, it also requires a broad distribution channel

which is very difficult to build and another most important factor which needs

to be considered before entering this industry is that is there any requirement

of more suppliers. At the moment firms have reached to a situation where it

fulfills the market demands and faces surpluses. Therefore, the threat from

entrants does not exist and it is not a feasible market to enter.

The industry is naturally protected against new entrants due to the large

investment cost and the long construction period required for building a new

cement plant.

High capital investment requirements, distribution network and oversupplied

markets deter entrants.

Technology easily available

4. Bargaining power of Suppliers:

The bargaining power of suppliers in the respective industry is very low.

Because the main raw materials used in the cement manufacturing process are

limestone, sand, shale, clay, and iron ore. The main material, limestone, is

usually mined on site while the other minor materials may be mined either on

site or in nearby quarries. Another source of raw materials is industrial by-

products. The use of by-product materials to replace natural raw materials is a

key element in achieving sustainable development. These raw materials are



available in abundant on the sites or with the suppliers of raw materials,

therefore the suppliers losses their bargaining power.

Most of the raw materials required for producing cement are directly extracted

or produced by manufacturers and are readily available in the region, with

minimal dependence on external suppliers.

Monopolistic control of external cost element (coal, power, transport) result in

high bargaining power of the government

5. Inter Firm Rivalry

Intense firm rivalry exists in Pakistan cement industry because there are a lot

of players in cement manufacturing industry. At present the supply for cement

is higher as compared to demand, therefore firms are relying upon their

locations and closeness to the markets which could affect their profits in a

manner that the freight charges for carrying cement from firm to the market is

very high, closeness to the market will reduce the transportation cost.

Moreover, In Cement industry oligopoly situation exists where all the firms

are selling cement almost at the same prices with the marginal product

differentiation. Most of the times larger number of firms cater to the same

market which also increases the competition, such as Maple Leaf, Dandot,

Pioneer, and Garibwal are all located comparatively very near to each other

and supplying cement to the same market due to which they face high inter

firm rivalry.

Almost all companies in the region are able to produce and sell at or above

their nominal capacities, eliminating the need for applying any kind of

competitive strategy or starting a price war among producers in an attempt to

gain market share.

Large number of players’ capacity in the short-term is expected to be surplus,

marginal product differentiation, high storage cost and high exit barriers in

terms of heavy capital investment.

5.4 BCG Matrix

There are two kinds of cement manufactured in Lafarge Cement Company, which are:

Ordinary Portland Cement

Sulphate Resistance Cement



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. Both of the products act

as ‘Cash Cows’ for the company because of the increasing demand of cement. Also

there are no substitutes of cement found till date.

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), hence; it is placed in the ‘Star’ position.


THRIVING!

DIE SLOWLY

SURVIVING

DIE QUICKLY

Effective

Ineffective

Efficient Inefficient


Chapter 6: Future Outlook

6.0 Strategies

6.1 Demand Factors/ Exploring New Markets

1. Develop new export markets and develop offshore markets and

production facility:



Exports should be focused on and to do that, phase one should be to market

the company’s product in international markets and then resultantly after

establishing the brand in south the company will focus on going about

developing an offshore facility for the export to these countries and to further

explore new offshore markets.

2. Explore new markets to maintain /enhance sales as existing markets in

India and East Africa are dying down, explore potential in Myanmar, Sri

lanka and Saudia Arabia:

The golden period extending from 2003- to 2008 as a result of improved

economic fundamentals, increasing spending on infrastructure development

and housing demand boosted domestic cement consumption 16% but the

global economic downturn resulted in toppling this growth and not only

demand on the international front fell but housing sector and public sector

development projects were significantly reduced and to counter this new

export markets need to be explored. At present markets in consideration for

exports are namely India, Afghanistan and east Africa. East Africa is imposing

duties of about 35%, India had planned capacity expansion that were due to be

operational by the end of this year so Lafarge should explore new markets

namely the Middle east market, Sri- Lanka and also export markets in Saudia

Arabia are removing ban on cement exports so Saudi Arabia middle east, Sri-

Lanka, china and even Indonesian and Myanmar markets are popular export

destination in the years to come so the company should focus on trying to

capitalize and position itself in these new markets as demand will gradually

phase out in the existing markets namely Asia, India, Africa, Madagascar, Iraq

and so new market exploration is the key to exporting

3. Focus on quality and stringent quality control:

Checking mechanisms should be installed like distributed controllers, PLC’s

and Online X-Ray Analyzers.

4. Develop alliances and look up potential targets for acquiring particularly

in the South regions due to proximity to port:

The case against mergers is strong in the industry as the sales are declining so

the company should develop strategy alliances in terms of catering to both

region combined and it should ideally enter into a partnership with a firm

located in the South region as the company itself is located in the North



region. This way the company will be able to cater to export markets and local

markets and gain more returns and better net margins along with increased

production capacity and distribution of the products. Cost of production

resulting from the ensuing economies of scale would be beneficial for both the

players.

5. Forward integration by forming strategic alliances with construction

companies:

The company should go for forward integration by having an alliance with a

construction group or a builder. could also develop a construction firm and

start developing projects and this would trigger demand for its cement

products and in this regard it could even if not establish its own construction

company partner with large Construction firms like Faisal Vawda Group

(FVG) a, for using their cement in their construction projects and develop

lobby’s in Bahria and other big developers and even with Amar Pakistan for

using its cement which would significantly improve its sales.

6. Develop new value added products like ready mix, Sulphate resistant

cement and white cement:

The company could also develop new products like ready mix and start white

cement production, as both these have high demand in the local markets and

so would trigger significant growth in sales revenue for the company.

7. Focus on export bases as PSDP and GDP the two main drivers of local

demand are falling:

Lower Public sector development projects this year as compared to last year

means that the company has to focus on export sales in a scenario where not

only sales are low but the prices are also depressed. Increased domestic

spending is expected as a result on increased public sector development

budget ensuing from reconstruction activities engaged in as a result of

construction of dams and the infrastructure development work as a result of

the flood impacts and would resultantly result in high demand in 20011 and

2012 so the company should prepare itself for higher sales in the future and

replenish inventories as well as develop strong lobby in the government to

secure contracts and work on its own fleet to transport immediately to these

affected areas.

8. Improvement of brand image:



Along with using only high quality raw materials rather than low quality

materials should be used and the focus should be on building the image of a

quality conscious brand in both local and international markets and presence

of the brand in local markets in terms of market penetration and also in terms

of product availability at dispatches around the country should be focused.

9. Export to Gulf Region as increased ill triggered growth in this region has

increased the potential demand in this region:

10. Oil prices triggered economic growth in GCC countries offers a huge potential

for exports to theses countries and effective steps should be taken by Lafarge

Pakistan to effectively go about marketing their product and exploring the

market and then attempting to capture a share in it by exporting to GCC

countries.

6.2 Location

Location in both the south and the north region the key to success in the industry

One of the major key success factors for the industry is a location of the industry near

to port. More than 85% of the plants located in Pakistan are located in the north

region (Punjab and Balochistan) and very few are located in the south region (Sindh

and Balochistan). Lafarge cement is located in the South region and so it can’t tap the

export market properly as a lot of transportation cost is involved and at present the

government is at present giving a subsidy on inland transportation and in the years to

come as part of the IMF planning implementation as theses subsidies will be phased

out it will render all plants located in the North region not to be able to export as

transportation costs will make in non-viable. Thus Lafarge should aim to establish a

production unit in the South region to be better able to export cement and capture the

export markets. Simultaneous presence in both regions namely North and South is

strongly suggested for viability in the future because of its simultaneous presence in

both the regions of the country which supported the company’s volumetric sales from

the Southern plant after floods devastation in rural areas of Northern region. 1QFY11

profitability is expected to decline by 27% YoY to PKR798mn (EPS PKR2.47)

mainly due to expected 17% YoY lower volumetric sales (13% decline in local sales

and 21% decline in exports). Top line is projected to decline by 15% YoY to PKR5,

464mn in 1QFY11 (owing to 17% YoY lower volumetric sales).

6.3 Infrastructure



1. Invest in port handling facilities

The Company should invest in port handling facilities and this should be done

in two phases. In Phase one the company should focus on transportation and

loading facilities at the port. In the second phase it should install silos facility

at the port for further enhancing its export with higher ship loading rates and

minimum risk of demurrage charges associated with the port usage.

2. Invest in own infrastructure

Development in Infrastructure and logistics to increase reliability and bulkers

to carry loose cement form the plant to ports is a viable strategy that can be

implemented or catering to large export orders on time and meeting

commitments to international buyers to increase the firms brand recognition

and gain appreciation in the international markets.

ON the port the company should establish its own cement handling facility

that should ideally have a dedicated system for discharging cement directly

from the bulkers (cement in bulkers is in loose form) to the vessel and at a

very fast pace so as to reduce the vehicles idle time in turn making shipments

timely as per the customer requirements. The company should also install

Jumbo Packaging machines at ports for onward cement dispatching to cater to

export markets.

3. Develop coal exploration by inviting foreign investors in this sector as it

would serve as low cost input for power generation as currently we are

importing coal

Sign Memorandum of Association with international affirms for extraction of

local coal so as to reduce the cost of production by 15-18%, but for this

process for the first batch of coal to be produced after mining, extraction,

purification and its delivery will take a few years but this in the long run

would be beneficial as local coal has historically been 20-25% cheaper than

buying coal internationally.

4. Companies can enter into contracts with international shipping

companies

Companies like MERSK to export cement to USA and other countries in huge

volumes and at lower cost as the main issue that arises in exporting to USA is

the high transport cost involved so if the company works on its costs than the

sector can actually capitalize on this market potential.



5. Shift to alternate fuels and alternate energy generation strategies

Rising Fuel costs seems to be a grappling issue for the sector as a whole as

67% f all costs of production of the cement sector as a whole are constituted

by fuel costs. A strategy to reduce the costs involves hedging against coal

price rise through trading in commodity markets in the futures on international

stock exchanges so as to hedge against rise in prices. Another strategy that is

also viable is waste heat recovery plant which takes the heat generated from

the operations and recycles it and generates electricity. Another way could be

that the company should switch form furnace oil to gas for its power

generation capacity and this project will result in bringing substantial cost

saving of about 50% in power generation. Since energy oriented fuel costs

account for around 67% of the Cost of production the company should

effectively start investing in this project top reduce costs. The latest

technologies to recover waste heat wasted in the process for generation of

electricity without wasting any fuel. The design of this plant will hinge around

the idea of en-capsuling the wasted heat from the production system and using

the steam heat to heat up boilers and theses will eventually turn the turbine

engines thus producing electricity form its own waste. The machine comprises

boilers, low pressure single condensate turbine, reverse osmosis process plant

an, pumps and a high tech PLC based redundant control unit.

6. Better cement storage facilities be made

Better cement storage facilities be made and air and moisture proof bags

should e made to improve shelf life of products for which all cement players

can collude and help develop an associated firm that meets this need of the

sector or partner with foreign investors to initiate investment into

manufacturing of cement bags.

7. Enter long term transportation contracts

As it is located upcountry in the north it should enter into agreements into long

term transportation agreements to secure discounts and seek reduced

transportation costs

6.4 Operational Cost Cutting Measures

1. Hedging against rising interest rates: This should be done by the company

for its existing debt since the sector is very highly leveraged and for the



company to survive in the long run and be viable it needs to hedge against the

financing costs. This could be don e by Lafarge resorting top provisioning

against interest rate hike through interest rate SWOT agreements. Under these

arrangements the company can swap its existing 6 Month KIBOR based

borrowing and pay fixed markup ranging between 7.25% to 9.32%. In

Addition the company can also enter into cross currency swap agreements

where it will have to pay 6 month LIBOR plus 0.85% and receive 6Month

KIBOR

2. Focus on equity rather than debt financing: For future financing needs the

company should use its string international brand name and recognition and

issue GDRs to be listed in international stock exchange and rely on equity

rather than debt financing from banks as that will resultantly remove viability

of its operations as a result of higher costs in a scenario where it has been

making losses in the past few years.

3. Focus on securing cheap future electricity contracts from KESC: Secure

power sales agreements with KESC for long term basis like say for example

ten years/ 20 years for up to 50 MW and this would lead to increased company

approximately Rs. 1 per share

4. Coal fired power plants: should be imported form china that rely on locally

available coal which is not only cheap but abundantly available

5. Collude with cement, rice and sugarcane industry: should work along with

cement sector to use by products of these industries to develop alternative fuel

that is efficient and cost effective fuel alternative

6. Expand production capacity: to realize economies of scale and focus on

investing in new technologies and also use the latest fuel consuming

components from European suppliers with combination of Chinese plant and

machinery which helps to minimize expansion costs.

7. Reduce investment in inventory: The Company can launch an RDS project

which would be based on usage alternate fuel obtained from burning garbage.

Other players in the industry, such as DG Khan and Lucky Cement are already

working on these lines. Lafarage was only selling OPC earlier but has now

started selling silos too. They can start selling SRC and ready mix to increase

sales volumes



8. Launch an RDS: The Company can launch an RDS project which would be

based on usage alternate fuel obtained from burning garbage. Other players in

the industry, such as DG Khan and Lucky Cement are already working on

these lines.

9. Other products: Lafarage was only selling OPC earlier but has now started

selling silos too. They can start selling SRC and ready mix to increase sales

volumes

6.4 Regulatory

1. Collaborate with government on waste disposal plant inputs Collaborate

with the government to provide solid municipal waste and use this as a fuel

instead of coal consumption and use recycling as a fuel instead of coal.

2. Sector contributing significantly to the economy so should use its strong

position and the fact that it contributes heavily to tax base to make

government develop sector friendly policies. The sector is contributing Rs.

30 Bn to the national exchequer as a whole so what is needed is the at all the

players collude in the name of common interest and push forth resolutions to

improve the viability of the sector through government initiatives such as

support pricing looking at the average cost of production of the various

players, reduction of port handling, port duties and docking cost on ports, so as

to make the companies viable in the long run and the amount of contribution

the sector makes is significant enough to push the government for reforms for

this sector. Also combined effort on part of all players needs to be taken to ask

the government to reduce the excessive taxation on this sector and resultantly

reduce the tax base of this sector so as to be able to cater to export markets.

Federal excise duty on cement has been raised to Rs 900 per Tonne from the

existing base of Rs 750 per tonne. The Finance Bill seeks to extend exemption

on ready mix concrete blocks. Previously, building blocks of cement were

only exempted under this Schedule. Despite the fact that cement constitutes as

one of the basic necessities for shelter, the policy makers have subjected the

cement sector to the highest taxation in the region. The levy of General Sales

Tax (GST) on cement is Rs660 per ton in Pakistan as compared to Rs320 in

India. it is said that Pakistan has one of the highest tax rates on cement in the

Asian region. The impact of such tax and duty structure has resulted in almost



40 per cent increase in the cement price per 50 kg bag when compared to India

suppressing demand for Pakistan cement.

3. Prepare for VAT implementation and estimate its impacts in the company. The

company should prepare itself for the VAT implementation so as to be able to

actually take into consideration the impacts that VAT may have on sales and in final

consumer prices which could affect demand negatively.

7.0 Recommendations

1. Focus less on debt financing as a solution to increasing cash needs as the

industry is already burned and highly leveraged with the total industry debt

standing at Rs. 120 Bn.

2. Government of Pakistan should actually go about helping the industry through

setting up a minimum price level that helps the firms survive in the face of low

demand locally and this price should be set looking at the cost of production of

the major producers and then on the basis of this set a price that is reasonable.

3. Also the government needs to actually increase the amount of inland freight

subsidy to go about facilitating export for companies producing cement who

are located in the north and cannot realize the full export potential due to the

high transport cost involved despite the subsidy.

4. At present government is giving a subsidy of around Rs., 24 per ton to the

cement sector as day duty drawback for export of cement and this needs to be

revised and in view of today this needs to be around Rs. 130 per ton.

5. The industry production capacity stood at 44.07 Mn tonnes which is going to

increase to 48Mn tonnes by the end of June 2011. Local demand n the country

stands at around 20 Mn tonnes which leaves a surplus of 24 Mn tonnes which

could be exported if the government provides adequate facilities on the ports

for handling and packaging of cement.

6. The federal excise duty on cement sector stands presently as per 2009-2010

budget at Rs. 900 per ton which is very high and apart form this 0.1% of ex

factory price is being charged as marking price by the government and besides

this provincial governments have a separate tax that they are charging from the

producers so this is a drain on the producers and adding significantly to the

cost of production of the producers and the government should attempt to



reduce the taxation on this sector as this would render it uncompetitive on

pricing if the present level of taxes on the international front

7. Withdrawal of the customer’s duty on Pet Coke and remove it from negative

list and at present stands at 5 percent.

8. Government should aim at removing transportation bottlenecks in the way of

exports 0f consignments to India and to port of Karachi which will increase

exports to African and Middle East Markets, Sri Lanka, Myanmar and other

Asian countries.

9. The export oriented refinancing facilities like export refinance being provided

to the sector has increased its applicable markup arte from 7.5 % to (% as a

result of the IMF policy of removal of subsidies which is endangering the

profitability of this sector that is at present highly leveraged and is burdened

with heavy taxation and reduced demand in the face of global economic

scenario and reduced Public sector development projects and so in the face of

these macro economic variables government needs to develop a plan to revive

the sector which has more than 19 firms of which just 4 have positive profits.

10. Govt. Should improve law & order to support export

11. Ban likely to be place on cement import

12. No changes in cement import and export policy.

13. Crisis: country faces energy crisis, another weekly holiday under-study.

14. Certain long, medium and short term measures should to taken under

consideration:

Short-term measures:

Duty drawback

Port charges

Medium term measures:

Abolishing of / reduction in central excise duty

Long term measures:

Infrastructure at port.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



15. 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.

Export of Clinker and Cement:

(Qty/Tonnes)

|------------------Cement-------------------| |---Clinker---|

Years Afghanistan IndiaOther

Countries

Other

CountriesTotal %age

Via Land Via Sea & Land Via Sea Via Sea Incr/(Decr)

2001-2002 106,620 - - - 106,620 100.00%

2002-2003 430,322 - - 41,500 471,822 342.53%

2003-2004 1,118,293 - - - 1,118,293 137.02%

2004-2005 1,407,900 - 157,270 - 1,565,170 39.96%

2005-2006 1,413,994 - 91,165 - 1,505,159 -3.83%

2006-2007 1,725,526 - 1,071,928 390,973 3,188,427 111.83%

2007-2008 2,777,826 786,672 3,045,995 1,106,127 7,716,620 142.02%

2008-2009 1,264,250 294,120 2,228,380 675,526 4,462,276 72.13%

(5-Months)


sm final report cement intdustry

Documents

cement sector

lafarge cement

cement industryduring

consumer of cement

chinese cement industry

lafarge pakistan cement

worlds cement production

total output of cement