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Global Commodity Research Section (Cement)

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Analysis Company, specialized in research and analysis of international trade and shipping of commodities. With the expertise in global trading and shipping of commodities, extensive and professional team of researchers and analysts, The Vision Research had gained prestigious position among the global and regional commodity trading houses, institutes and Journals.

Currently, it is actively serving with its commercial research and analysis business for global organizations and governments. It also prepares and publishes research reports for free education and information for individuals, students and faculties through its channels on internet.

The Vision Research team has studied and is studying cement market of Mozambique for since 2008, aiming to boast cement market exploration opportunities and possibilities to increase its presence into global cement trade research. It conducted visits to various markets and regions of Mozambique, including Maputo, Nampula, Safola and Pemba regions for its study, meetings, discussions and interviews of Executives of current and future cement manufacturers, Investors, importers and traders of cement in Mozambique.

First report of its study is being published about Cimentos De Nacala with further updates, coming in following months for the criticism and study of faculties, students, trading and research institutes as well as commercial organizations. Comments and feedback is requested by return with thanks in advance.

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Syed Haroon Haider GilaniC.E.O. THE VISION Research

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Global Commodity Research Section (Cement) Ph: +92 21 34684336Fax: +92 21 34784337Email: research@thevisioncorporation.biz

Pakistan's cement export – Potential, Trends and Problems

Our recent research revealed that by the end of FY09, Pakistan had installed capacity of 44.8 million tons (35.9 million tons in North and 8.9 million tons in South) of cement production while it produced about 33.2 million tons of cement during FY09. Almost 8 million tons of cement production capacity is closed during FY 09 due to lower demand in domestic and international market and increased losses due to the prices being under pressure during FY09. According to a recent research conducted by Topline Securities (Pvt) Ltd, "The actual capacity that can be utilized today is 40-41mn tons because there are few capacities that due to old technology are not feasible to operate with current (profit) margins".

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Global Commodity Research Section (Cement)

During the period of June 09 to June 10, Pakistan cement sector has dispatched almost 23 million tons to domestic market while dispatches to International market remained at about 10.50 million tons totaling the exportable potential of 15 million tons with Pakistan's cement industry for FY 10. Cement exports from Pakistan has been increasing gradually since FY 01 but current fiscal year has posted negative growth in terms of volumes first time in last decade (See the Chart 1.0).

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Global Commodity Research Section (Cement)

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

0

2000000

4000000

6000000

8000000

10000000

12000000

Afghanistan

India

Other Countries

Other Countries

Total

Chart 1.0: Cement & Clinker Exports from Pakistan during 2001 – 2008 (Source: APCMA).

To understand the causes of this decline and the future trends for the exports, we have conducted a thorough study, discussions and exchange of information with Pakistan's government, cement industry officials, experts, analysts and traders across the country during the months of May and June 2010. These efforts revealed that due to the economic meltdown in International market during 2008 – 09, particularly hitting Gulf Cooperation Council's (GCC) dollar exchanges, bank operations, real estate development, tourism, oil production, and public and private income areas, pushed both the demand and supply for construction materials downwards. Although cement exports to Iraq has seen a growth of 6% on Y-O-Y basis during FY but as the GCC has been main focused market for Pakistan's cement exports since 2007, its impact on cement exports is significant. During FY09 demand for the cement in the region declined around 95%. Mr. Muhammad Ali Tabba, CEO, of Lucky Cement Limited, The largest manufacturer of cement from Pakistan in a meeting, with The Vision Corporation, reasoned the decline in the export during FY09, "being Gulf Markets are all self sufficient. They are not importing anything from Pakistan. GCC was a major market (for Pakistani cement) and once upon a time when only Lucky (Cement Ltd.) was exporting around One million tons (annually) to GCC". Mr. Tabba is of the view that the growth in exports in not seemed hopeful for FY10 but it will be enough if the current level of exports can be maintained.

Indian declined demand for imported cement has also played significant role in the lower exports from Pakistan. Demand of cement in India fell 2 – 3% due to consistent demand from government-sponsored rural infrastructure projects and lower capacity additions during FY09. During 2010 – 11, Indian cement industry is expected to add 50 million tons of capacity and another 35 million tons during 2011 – 12. Talking about the demand, key players in demand of cement in India are Real Estate Sector, Infrastructure and Industrial projects. During FY 2003 – 07, cement demand in India has grown at a CAGR

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Global Commodity Research Section (Cement) of 8.37% higher than the CAGR of 4.84% of supply. The situation leads the opportunity for Pakistani cement industry to export its surplus cement to Indian market in 2007.

Indian Cement Industry also responded vertically to the opportunity of growth and during last three years, Indian cement industry's growth is recorded at CAGR of 10%. It converted India being the importer of cement into the exporter of cement during FY 09. Indian industry has overcome the demand & supply gap (See the chart 2.0), leaving little space for imported cement, hence we see a further negative progress for Pakistan's cement Industry in terms of export to India.

Supply - Demand Scenario Current

FY 09-10

Expected

FY 10-11

Expected

FY 11-12

Installed Capacity 242 288 304

Consumption 196 215 236

Export 5 5 6

Surplus 41 68 62

Chart 2.0: India Cement Industry Analysis – Demand / Supply – Scenario. (Source: Lotus Global Equities).

Our research team concluded that import of cement in Sudan has started to adapt the new import prices due to decline of Euro against Dollar. Although, unexpectedly local cement is priced at $8 per 50 kg bag, less than the landed cost of imported cement from Pakistan. It was in reverse order by the end of May 2010. The change in prices is reasoned behind the domestic cement industry’s efforts to compete the imported cement with increased supply and lower prices in Sudanese markets.

Export potential and trend in export from Pakistan during FY10 is projected with mixed opinion from Pakistan's cement industry players. Lucky Cement Limited and Attock Cement Limited are off the opinion that more demand will come from Iraq and Sri Lanka in the coming months while no other potential market is seen during the next year. They are of the view that some further decline in demand by India and from Sudan will be covered by this increased demand from Iraq and Sri Lanka that will enable cement industry to maintain the export level of 10 to 11 million tons in FY10.

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Global Commodity Research Section (Cement) Trends in major markets for Pakistani CementPakistan's Cement Industry leaders in export and production are eying Iraq, Sri Lanka, Afghanistan and some East & South African countries as potential and regular importers of cement from Pakistan during FY10. We have prepared a brief about these markets to understand the trends and potential for our readers.

Iraq Cement Market Currently Cement industry of Iraq is producing about 7 million tons of cement annually while the

demand is double than the production. Several UAE developers showed interest in reconstruction projects in Iraq back in 2007 - 08. As the financial crisis crashed the property and real estate developers of UAE down, their interests in Iraq also faded out. In 2010, some companies seemed interested in development of infrastructure projects in Iraq and they are looking to overcome the problems in Iraq, including funding of projects as it is very hard to raise funds locally for project finance, leaving the only option to rely on external finance, land ownership for mortgages etc. So far, most of the construction projects are reported to be dominated by Jordanian companies in Iraq.

It is currently difficult to estimate the accurate figures about the demand for cement in Iraq; production figures are probably reasonably accurate, however the total import figures since the second Gulf War, the consequent occupation and the rehabilitation of infrastructure are very likely to be inaccurate. The borders of Iraq remain extremely porous, and customs statistics, where these are collected are imperfect. The following paragraphs estimate total current demand from counter trading partners and domestic production and other sources as cited. According to Provincial Reconstruction Team Leader Mr. Paul O' Friel and special correspondent Nigel Atkin the total annual demand of cement in Iraq is 30 Million tons while the domestic industry was producing around 3 Million Ton annually in 2008 - 09.

Current designed capacity for the Iraqi cement industry is estimated at some 16.9 million tonnes per annum, in 2004, with a further 2.6 million tonnes in the Northern region administered by the Kurdish Regional Government (KRG). However actual production in the non-KRG area was estimated at some 2.5 million tonnes in 2004, or less, dependent upon source, some 3 million tonnes in 2008 and 7 million tons in 2010.

The domestic demand for cement has risen with the rehabilitation of the country. However the domestic supply has not kept pace with the increases in demand and the price of cement has therefore been elastic with prices in 2003 quoted at USD 20 per ton and reportedly rising to USD 120.00 per ton in 2005. However, the quoted price for October 2006 was USD 46.00, bagged. Currently it is standing at USD 120 – 125 as reported by our sources in Iraq.

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Global Commodity Research Section (Cement) South & Far East Asian Cement Market

Among the top Asian markets for Pakistan cement is Sri Lanka which is seen a market with potential of about 1 million tons of cement import by Lucky Cement Limited of Pakistan in a recent meeting with The Vision Corporation.

Sri LankaDemand of cement in Sri Lanka is expected to grow with 7% aimed to reconstructions of war-torn

areas in particular while the resettlement & rehabilitation of displaced Tamils in other areas will increase the demand of cement in general. Beginning of 2010, posted growth of 12.5% in imports of cement with imports reached at 486,000 tons from previous year.

PhilippinesWe consider The Philippines as potential market for cement from Pakistan where demand and

supply gap is widening since late 2009. My research noted that Republic of Philippines is dominated by Lafarge, Holcim and Cemex with Lafarge having capacity of 8.522 Million Tons, Holcim 5.435 Mn Tons and Cemex with 5.07 million tons. It makes their market share, 38%, 25% and 23% respectively. Rest of the share remains with small companies including Northern Cement Corporation (5%), Goodfound Cement Corporation (2%), Pacific Cement Co. Inc. (2%) and Taiheyo Cement Philippines Inc. (5%).

According to the Mr. ERNESTO M. ORDOÑEZ, President, Cement Manufacturer’s Association of the Philippines, “Cement demand in Republic of Philippines jumped from 1.6% in 2008 to 9.5% in 2009. From the imports side, Although Republic of Philippines has been growing negatively in imports of cement since 2000 but current surge in demand that continues in 2010 shows possibilities for Pakistani cement to enter into the market directly or indirectly. Below graphs show the picture of cement import and export of The Philippines.

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Quantity(Metric Tons)

1,579,027 2,233,180 337,600 9,700 12,705 116,302 243,695 302,003 113,301 1,000

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Global Commodity Research Section (Cement)

20002001200220032004200520062007200820090

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Quantity

Philippine Cement Imports during 2000 – 2009. Source (CEMAP)

The graph shows domestic cement industry’s supply variations and domestic demand’s stipulation during past decade. Our forecast for 2010 is estimated the possibility to supply 250,000 Tons to 300, 000 tons. The forecast is based on the East African Model, where the International cement players are dominant and the prices are higher reasoned the higher energy input costs. Pakistan’s cement has gained its place in East African markets only due to the lower price and availability. The situation in RP resembles with East Africa. In order to sustain the higher prices of cement, the prime beneficiaries of RP cement industry are urging the Government to impose 5% duty tariff on cement imports. They are also trying to pressurize the government by entitling the imported cement as “low – quality”. The campaign is carried out directly and indirectly as recently a report from The Center for Anti-graft and Corruption Inc surfaced that asks RP government to put further restrictions on the imports of cement by placing barriers like tightening testing rules.

East African Cement MarketThere are eight cement producers, united under the umbrella of East African Cement

Manufacturer's Association in three mainland East African countries including Uganda, Kenya and Tanzania. Kenya has three cement manufacturers including Bamburi Cement Limited, East African Portland Cement Company (EAPC) and Athi River Mining Limited, each controlling the market share of 60%, 34% and 6% respectively. Uganda has two cement producers, namely Tororo Cement Industries Ltd & Hima Cement Ltd whereas Tanzania has three cement manufacturers, Tanzania Portland Cement Company (TPCC) also known as Twiga Cement, Tanga Cement Company Ltd, also known as Simba Cement and Mbeya Cement Co., Ltd. Almost all the cement producers belong to large international cement

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Global Commodity Research Section (Cement) companies with Lafarge having ownership in five of the eight cement companies:- Hima Cement Ltd, Bamburi Cement Ltd, EAPC, Mbeya Cement Co. and part-ownership of Athi River Mining Ltd.

By mid of 2009, most of the cement imported into East Africa was procured from China but by May 2010, East African market is dominated by Pakistan's cement industry for the cement supplies. Notice, for example, about 10% of total demand in Tanzania was met by imported cement, mainly from Pakistan. Although the three local producers, with combined installed capacity of 3 million tons per annum has capability not only to met the local demand of 2.2 million tons but also leaving 0.8 million tons per annum surplus capacity but still imported cement has gained its place in the market. We found the reasons being the cheaper prices of imported cement, logistics problems to certain areas, high costs of production, power shortage like problems, faced by Tanzanian cement manufacturers has lead Pakistan's cement a significant space in the market of Tanzania. In view of the East African Cement Producers Association (EACPA) Tanzania Chapter chairman, Mbuvi Ngunze, despite the global financial crisis during 2008 – 09, Tanzanian cement market has shown upward trend in demand. This was benefited by the foreign cement manufactures mainly.

At the same time, shilling depreciation against dollar is causing the price of imported cement high and a threat to cement exporters, mainly to Pakistan. Imported Cement's price has reached 12,500 TZS (US$ 8.59) per 50 kg bag in May 2010, almost same to the price of locally produced cement. We have found some traders of cement selling imported cement at the price of local cement in Dar Es Salaam, comprising 45% of Tanzanian cement market.

Kenyan Cement Industry also holds majority share in neighbouring Ugandan cement market. The acquisition of Hima Cement Ltd in Uganda, by Bamburi Cement Ltd of Kenya in late 20th century also diversified the company’s revenue base, allowing it to take advantage of the high economic growth in Uganda at a time when Kenya was in bad shape. In 2002, Uganda contributed nearly a third of the Bamburi Cement’s sales and operating profits. With Hima currently enjoying market leadership in Uganda with 55 per cent market share and the combined Bamburi Group currently commanding a 58 per cent share of the East African cement market, the deal has paid off.

There is a rift between East African Cement Manufacturers and East African Governments about the imported cement and it's strengthening position in East African markets. Both sides have been putting pressure to each other, since EAC custom union has reduced the import duty on cement to 25% from 40% in June 2009. Cement in East African countries was classified as a sensitive product in 2005 with the import duty set at 55pc, which was to be reduced by five per cent every subsequent year. East African Cement Manufacturers and their supporting business organizations consider it an act to ruin domestic cement industry by opening the doors for cheap imported cement into East African Markets while the relevant government bodies reason it as a step to keep the supply of cement steady in East Africa at lower prices where Cement demand is expected to grow by 33 per cent to eight million tons in 2011 from six million tons in 2009.

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Global Commodity Research Section (Cement)

In May 2010, when Government of Pakistan has granted a 35% inland freight subsidy to Pakistani cement exports through sea, East African Cement Manufacturers were seen to be very active to pressurize their governments by highlighting the possible losses to the East African cement manufacturers due to further decreased prices of imported cement.

In response to the demand of cement manufactures to impose the import duty on cement, Uganda's ministry of Industry says in a statement, "The government is also interested in establishing the relative pricing between local and imported cement and is investigating the breakdown of the cost elements. This will enable it confirm the concerns players in the industry have towards the imported product." At the same time, Government of Uganda is urging East African Community (EAC) to scrap the 25% import duty on construction materials to zero level to further decrease the prices of imported cement in the markets.

Besides these efforts, East African cement industry is committed to its stance about the restoration of import duty on the cement. On June 11, 2010, in annual meeting of East African Cement Manufacturer's association, held in Kampala, Uganda the main standpoint of the speakers including Mr David Njoroge, the EACPA Uganda chairman, Mr Harpreet Duggal, EACPA Secretary and EACPA Tanzania Chapter Chairman Mbuvi Ngunze was to restore cement to the sensitive product status, which would restore the Common External Tariff (CET) to 35 per cent or Shs100, 000 ($50), to limit importation and consumption of imported cement. From the government side, the response seems still negative, as proven by the recent interview of Mr Syda Bbumba, The Honorable Minister of Finance of Uganda, in which he says, “We don’t take whatever they propose, we sat and agreed as ministers of finance from the five partner states to maintain the tariff.”

The policy of EAC proves a sustainable market for Pakistani cement in East Africa where the cement demand is increasing, cement prices are increasing, possibilities are increasing but also the competition is increasing because India has been the traditional supplier of cement to East Africa till 2006. Now India is also exporting its surplus to East Africa and during FY10, Indian exports to East Africa are expected to grow further and expectedly more rapidly than Pakistan. Pakistan's cement industry must focus with special measures and marketing strategies, automation in supplies and more interaction with the region to overcome the competition.

South African Cement MarketSouth African market consumed 14.9 million tons of cement in 2008 while the figure is expected to

reach 23.1 million tons per annum in 2015. The South African Government planned to deliver 630,000 homes a year between 2010 and 2015, assuring a high and steady demand for the cement. Main consumer of the cement is residential building construction sector with 50% of total annual consumption.

Demand for cement has seen rapid upward trend in 200, when South African government planned to invest R400 billion in infrastructure development including the Gautrain rapid-rail link, airports,

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Global Commodity Research Section (Cement) stadiums and other preparations for the 2010 soccer World Cup, power utility Eskom's R150-billion five-year capex plans, and road, rail and housing projects. By the mid 07, the demand of cement in the Southern Africa Customs Union (Sacu) that comprises South Africa, Lesotho, Botswana, Namibia, and Swaziland, has grown to 14 million tons per annum. In the annual report of Pretoria Portland Cement (PPC), it was told, "A scenario of a continued 5 percent annual growth rate from the current market level implies that nearly 700 000 tons of new national capacity will be required per annum, or the equivalent of one new 1.5 million ton production line coming on stream every second year."

By the mid of 2007, all the cement companies of South Africa were reported to be importing the cement to cope with domestic demand. Pretoria Portland Cement (PPC) said it would import between 300 000 and 500 000 tons of bagged cement to alleviate shortages in South Africa. Black-women-owned investment and operating company Wiphold signed two agreements, one with the Chinese cement company Tangshan Jidong Cement to import high-quality cement from China, and one with the South African Bureau of Standards (SABS) certifying the cement quality. Meanwhile, Pakistani cement producers were also in process to obtain governmental quality certification for Pakistani cement to be exported into South African Customs Union. Lucky Cement of Pakistan succeeded into acquiring the certification from SABS and started exporting cement from Pakistan to South Africa by early 2008. Lucky Cement, the only Pakistani cement producer with approval to export cement to Pakistan by mid 2010, has appointed two agents in South Africa with sole distribution rights, namely Alpine Whole Sale Trade and New Castle Steel Works. According to General Manager Exports of Lucky Cement, “This decision was taken because of regular supplies as we have printout their bags to avoid manual stamping of LOA# , buyer name and Batch #, which were causing us extra labour and can be a chance of mis printing or mistakes in information on the bags” . Lucky Cement Limited is estimated to be exporting about 200,000 MT of bagged cement during 2010 – 2010 annually. The trend is declining after the FIFA World Cup is over and demand of cement in the region is not surpassing the domestic supply ability.

Due to the limitations by the editor, we can’t expand our discussion towards regional supply position that is in abundance, creating tough competition for Pakistani cement export, particularly in terms of prices. We consider the lower prices of Pakistan’s cement as the most important factor in its leading role to cement importing markets. Other markets have or may have better infrastructure and facilities to export cement. For example, a buyer of clinker can benefit better price of CFR basis, if buys from Indian clinker exporters like Ultratech Cement because of dedicated clinker loading infrastructure where the loading can be upto 18,000 tons per day compare to 5000 to 8000 tons per day in Pakistan. It saves reasonable cost of shipping costs to the buyers.