Having cushioned itself through exports against the fall in domestic sales, Pakistani cement industry has been able to maintain its revenue growth so far. But changing market dynamic in the region demands a proactive business management.
By and large, the industry was able to survive on the back of 47 percent growth in overseas sales in fiscal year 2009 that more than offset the impact of 14 percent drop in domestic sales. But this can flip in the coming year.
Amid slowing construction demand in the country, reliance on exports will no more be an easy option because that market is likely to become more competitive in the coming years due to increased output capacity in the region. With plant expansion in many Middle Eastern countries along with India, China and Iran due by 2012, a price war is on cards. The excess capacity in these countries is mostly aimed at tapping export potential given that existing capacity in many countries such as Iran and Saudi Arabia is enough to meet their current and future domestic demand. This means that in order to maintain their export growth trajectory local players will have to become competitive, achieve economies of scale and maintain low cost of production level.
With 60 percent of their cement production cost stemming from energy bills, Pakistani cement makers are currently challenged by those in the region, where energy expenses account for half the amount. (See graph)
Currently, the industry is largely dependent on imports of coal from Indonesia and South Africa and, thus, prone to increase in coal prices and rupee depreciation. But there are a number of ways out. One such measure, for instance, to reduce this inefficiency is by switching to alternative fuel from waste, including Refuse Derived Fuel and Tyre Derived Fuel (TDF) mechanism. In addition to the energy problem, Pakistani cement manufacturers have to find ways to reduce distribution costs. While those in the countrys south are already enjoy efficient distribution, its the firms in the north - which account for 80 percent of total production - need to reassess the options.
So, while major exporters such as Lucky, D.G Khan and Maple Leaf, would have to take proactive steps to reduce production costs they also must begin searching for new export avenues in order to survive in the troubled waters ahead. And since achieving energy efficiency in Pakistan is still a long way to go, tapping new markets becomes a more immediate need. Perhaps, the industry should capitalise on Pakistans geographical proximity with Central Asia by seeking market access to the fast growing economies of the region. But for that they need a diplomatic push.