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If there is one lesson that Pakistani companies could learn from the cement business, it is how to make money in a demand drought. There have always been rumors circulating in the market that the industry operates like a cartel, and there is historical evidence that may indicate it. But at the expense of sounding dismissive, in a country where political relations and influences dictate policy, and the system is weak and fragile to rampant rent-seeking behaviors, the cement cartel is mostly innocuous.

A little caveat here: as coal users, the environmental impact of the industry—from large CO2 emissions to water and air pollution affecting local communities—may not be very well-documented but is substantial and must not be discounted. This matter is for the EPA to take up in punishing violations and for the government to take up as a long-term collaborative policy.

But here are companies that have spent significant sums of money on ensuring that they have multiple sources of fuel that could be produced in-house to supplement their electricity usage leading to significant energy and cost efficiency, by updating and expanding their capacities to meet the growing demand in the market, and exploring export markets to sell overseas what they cannot sell at home to hedge against their imports and cover fixed costs. Other import-dependent industries have only struggled to make this happen. Many major export-oriented industries in the country enjoy preferential (bilateral or otherwise) treatment from countries where they are exporting, but cement makers have had to be competitive.

The latest numbers from the current fiscal year are stark. In 3M already, total dispatches are down 14 percent due to slow domestic demand across the country. Infrastructure development has been slow to recover and real estate activities have stalled for over a year now. The impetus in the construction industry brought forth by the Naya Pakistan Housing Program busted as quickly as it had boomed (read: “Now you see it, now you don’t for an update on that) and consumers/investors at home are waiting for the economy to “stabilize” before they can make decisions related to large purchases. Uncertainty can kill transactions, and that is visible in the real estate demand, not to mention, shrinking wallets.

At such a time, exports share for cement has grown significantly to 25 percent with impressive re-entry into markets such as Sri Lanka where import duties have lowered, and exploration of new markets such as the US by certain cement companies that will open doors in other countries too. Exports have also become more competitive in other traditional markets.

There have been times when exports share in total dispatches, tanked, but that has historically always coincided with substantial growth in domestic demand. But when cement manufacturers have enough capacity, and if there is excess cement in production, exports often come to the rescue. This enables companies to keep making money even when the economy is down.

That is not to say, that exports are where the major earnings are, but it is certainly a contingency plan that works. Other clear wins are investments that could generate “other income”, improving margins by procuring coal from multiple sources and making prudent inventory management decisions, and using captive power sources and alternative fuels to rely less on the grid.

While it is true that the industry holds pricing power in the local market, in the absence of competition and imported sources, insofar as their own long-term survival is concerned, cement companies are doing a stellar job.

Comments

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KU Oct 17, 2024 03:24pm
The 'little caveat' in using coal has fatal long-term impact on human lives n ecology, so its not 'little'. But given our EPA or govt's uncivilized/uneducated mindset to dangers, this shall pass too.
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