For Pakistani cement manufactures, the beginning of the fourth quarter FY10 has given many exciting reasons to beam. The sole reason behind growing optimism is the allocation of inland freight subsidy on all shipments made between March 26 and June 30, 2010.
The facility, which was initially provided mainly to cement makers in the countrys north, has now been extended to southern manufacturers as well i.e. those located within the range of 100 kilometers from the seaport.
Assistance in the form of a 35 percent freight subsidy bodes well for cement producers, since it will result in average transportation cost savings of $5 per ton and $1.25 per ton for northern and southern manufacturers, respectively. The decision comes amid a gradual recovery in cement demand at home as well as growing number of orders in international market.
Industry sources reveal that domestic cement sales rose to 17.5 million tons during the nine months ending March, up from 14.9 million tons in the same period last year. If this trend continues at the same pace, full year domestic sales would likely touch 23 million tons. Likewise, cement exports during the first nine months increased nearly 9 percent year-on-year to 8.3 million tons - a number which is seen rising further by the end of this year.
Just as lower shipping freight has augured well for cement trade of late, inland freight subsidy would also provide impetus to increase presence in overseas markets. Overseas cement sales is now easily seen meeting its full year target of 11-12 million tons. As a result, full year total industry dispatches will likely reach around 34 million tons, up 11 percent compared to last year.
However, if the purpose of inland freight subsidy is to boost exports, then the three months window is too short an opening.
"Benefits from this facility would be higher if the government extends this facility into next year, since many of our contracts are long-term in nature," says one cement maker. Others are demanding additional incentives in the upcoming budget to capture growing demand for cement in Africa and conflict torn countries like Iraq, Sri Lanka and Afghanistan.
But wish lists aside, the reality appears bitter. For a government as fiscally constrained as Pakistans, extending freight subsidies might be difficult decision to make. Cement makers are best advised to not to wait for an extension in subsidy and make hay while the sun shines.
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