Clash of clans: Cement makers face split in their ranks

Lucky Cement, the largest manufacturer, leaves association.

KARACHI:

A strong lobbying group of cement manufacturers in Pakistan is facing one of its toughest challenges as cracks appear in its ranks following strong differences among members over determining cement prices.

The differences have grown to such a point where Lucky Cement, the largest cement manufacturer in the country with 18% market share, has decided to leave the body – the All Pakistan Cement Manufacturers Association (APCMA) – as it disagreed with some of the policies of the association.

“We have some issues with policies of the association,” a top official of Lucky Cement told The Express Tribune on condition of anonymity. “But we may rejoin the association if it addresses these issues.”

Analysts say the news of Lucky’s exit from APCMA kept doing the rounds in the Karachi stock market that led to the decline in cement sector’s shares on Thursday.

When asked whether the exit would bring down cement prices in the market, the company official replied: “No, I doubt this will affect anything much including cement prices.”

Sherman Securities on Thursday reported that share prices of cement companies fell on the back of news that Lucky Cement had left the association, meaning cement prices could potentially fall in the near future. However, it said, negotiations were under way to draw Lucky back into the fold.

Apparently, there were differences among cement manufacturers on determining product prices, Atif Zafar, analyst at JS Global Capital, said. “But it is too early to predict whether the cartel (APCMA) is going to break up. If it eventually breaks up, it will cause a decline in cement prices,” he said.

The differences among APCMA members grew when some cement companies published advertisements in newspapers, asking the government to increase gas prices for captive power plants in line with the rise in electricity tariffs and provide a level playing field to all cement manufacturers in the country.

Since most of the cement manufacturing units are connected with the national grid, their cost of production jumps much higher when power tariffs are increased compared to a few strong cement companies that have installed their own gas-fired captive power plants.

“The government has done great injustice as far as small cement players are concerned. It increased electricity prices by over 50% but gas prices went up just 17%, which completely disturbed the balance between costs of production of cement manufacturers,” said the CEO of a small cement company whose plant runs on national grid.

Cement companies that are connected with the national grid say their production cost has gone up 35% with the recent increase in power tariffs as per unit electricity cost has jumped from Rs9 to Rs15-16.

On the other hand, cement companies that have gas-powered captive power plants have seen just 17% rise in their gas bills and their per unit cost has jumped from Rs6 to Rs7, according to the CEO.

Big cement companies, especially Lucky Cement and DG Khan Cement, have installed captive power plants and they can easily absorb the rise in gas prices and do not need to increase cement prices as much as other manufacturers want, say market players.

However, most of the APCMA members that number around 15 are on the national grid and seek a much higher increase in cement prices. And historically it has been seen that cement companies never compete with each other on price, keeping rates uniform across the board, something that smaller companies may be finding hard to do with the jump in power rates.

Despite repeated phone calls, the APCMA spokesperson could not be reached for comments.

Published in The Express Tribune, August 30^th, 2013.

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