Realising that the local auto manufacturers have been scared away by a combination of high production cost, economic uncertainty and an incoherent tax regime, this years budget has paid heed to local manufacturers by altering polices that will rationalise and equalise the tax regime within the industry.
The government broke the mould after they announced the withdrawal of sales tax exemption on ambulances. The decision came out against hospitals and NGOs, but is largely in favour of local manufacturers as they would be able to claim input sales tax, thus creating a level-playing field between local manufactures and CBU (ambulance) importers.
Similarly, removal of sales tax exemption on CNG kits, cylinders and valves etc would eliminate tax discrimination between local manufacturers -, for instance, those that sell CNG fitted vehicles - and vendors of aftermarket CNG kits and cylinders.
While the elimination of sales taxes amnesty on vehicles exceeding 5 tons gross weight and on heavy commercial vehicles - which cover trucks, dumpers, trailers, road tractors etc. - would talk down unfair competition in the commercial vehicle industry. But, there is the rub since vehicle prices will increase after the implementation of sales tax.
As the budget paper remained quiet on increasing customs duty on imports of high-tech parts from the existing 32.5 percent to 50 percent, the manufacturers will be breathing a sigh of relief. Under the Auto Industry Development Plan, manufacturers were liable to localise certain high-tech parts used in vehicle manufacturing within the ongoing fiscal year, which, otherwise, would attract customs duty of 50 percent.
While the government rejected a proposal asking for cuts in duty rate on the import of CKD and CBU, it granted duty reduction on import of specific raw materials and components to the vendor industry, to boost the manufacturing base.
The removal of special exercise duty, along with the reduction in sales tax is good news for car buyers as it will cumulatively decrease car prices by 3.5 percent. This means that local car assemblers would witness weak sales data in the last month of the current fiscal year.
However, budget was a few fries short of a Happy Meal, since the government extended regulatory duty on cars and Jeeps having a capacity of over 1800cc. Potential car buyers and commercial traders have criticised this decision on the grounds that these cars are not locally assembled in Pakistan.
Cementing gains in FY12
As the much awaited budget and related measures for the cement sector were disclosed last week, so were data on cement dispatches for July-May FY11.
Looking at the figures, it appeared that May 2011 saw a continuation of the effect of a slowdown in construction due to labourers substituting construction work with work on wheat harvest. Month-on-month, both local and export dispatches depicted an overall decline, in most likelihood because of the wheat harvest effect.
For July-May FY11, both local and export dispatches declined, with local dispatches carrying the brunt of the floods that hit the country in the beginning of the fiscal year, and export dispatches falling prey to competitive price pressures in international markets.
Year-on-year gains for 11MFY11 were only seen in dispatches to Afghanistan and those in the south. Developmental work in the former and relative low-cost advantage, induced by lower transport costs, of southern cement players - which helps their sales when cement prices are high - helped these regions.
However, the overall negatives of the sector may be slightly blunted by the takeaways of the FY12 budget.
The abolishment of the federal excise duty from Rs700 per ton to Rs500 per ton would not only reduce the retention price of cement by Rs10 per bag in the coming fiscal year, but part of the decrease will also be passed on to consumers, plausibly helping uplift cement demand in the country. This benefit gets clubbed with the gains from the abolishment of SED as well as from the slashing of GST by 1 percent.
The fact that FED will be gradually phased out of the sector also bodes well for cement players. Because cement is a key item for development, the levying of excise duty, conventionally used to discourage the consumption of certain items, was not judicious to begin with.
Further, lending support to the sector was the budgetary decision to include the Bhasha Dam amongst important projects for the fiscal year. The project is expected to generate additional cement demand hovering between 1-1.5 million tons, according to a pre-budget report by AKD Securities. This is roughly 3-5 percent of total cement dispatches of the country, and between 5-7 percent of local dispatches.
In addition, the cement sector is tied strongly to PSDP due to extensive construction work involved in most developmental projects.
The allocation of Rs730 billion is greater than the last fiscal years budgeted Rs646 billion. Even if the actual utilised amount will be less than the budgeted amount for FY12, - as has been the
orm with the government over the past few years - a higher budgeted allocation for this year lends some hope.
Though the governments decision on the abolishment of freight subsidy for the transport of cement - a longstanding demand of northern cement manufacturers - was nada, the sector did take home some positives, which will further boost construction in the country.
While FY11 had been a tough one for the sector, as obvious from the dispatch figures, FY12 is expected to be gentler towards cement players.
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Pakistans cement dispatches
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tons (mn) 11MFY11 YoY May FY11 MoM
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Local 19.9 -7% 1.9 -8%
North 16.2 -12% 1.5 -9%
South 3.7 20% 0.4 -3%
Exports 8.5 -13% 0.9 -6%
Afghanistan 4.3 17% 0.5 -6%
India 0.5 -20% 0.1 -32%
Other, clinker (sea) 3.8 -31% 0.3 1%
TOTAL 28.5 -9% 2.8 -8%
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Source: APCMA
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