Cementing the industry’s growth
Manufacturers must focus on production organisation, training and tapping new export markets
Manufacturers must focus on production organisation, training and tapping new export markets. PHOTO: FILE
LAHORE:
A flourishing cement industry is quite significant in a developing country’s economy, since its cumulative output growth is closely associated with economic growth.
The double digit output growth of the cement industry from 2002 to 2008 is the manifestation of stable economic growth in Pakistan.
The productive capacity expanded from 16 million to 38 million tons during this period which is unprecedented in the history of Pakistan. However, the industry has been weathering the storm since 2008 which requires an analytical lens.
The global financial crises brought a general economic slowdown across the globe. As a consequence, the external account deficit spiked to around eight percent of the GDP in Pakistan which put the economy in an inflationary spiral and brought it to knees.
Pakistan had to take a ‘standby agreement’ with the IMF owing to acute balance of payment crises from 2008-2011. As a consequence, macroeconomic stabilisation took a driving seat and the focus of the economic managers shifted to reducing fiscal deficit along with a tight monetary policy regime.
This combination of policies without meaningful structural reforms sapped the growth potential of economy. This tightening brought an economy wide slowdown which has affected the cement industry a great deal and a surplus production capacity of more than 10 million tonnes became a norm for the industry.
Usually, the manufacturers hate huge surplus capacities since their tied up fixed capital doesn’t bring any return for them. Under such abnormal circumstances, a few efficient manufacturers can produce at lower cost and are able to sell at a lower price.
This situation may spark a ‘price war’ among them. This is exactly what happened to the Pakistani cement industry, a ‘price war’ began in 2009 which ultimately brought huge losses for most cement manufacturers. However, a few efficient ones remained insulated from these losses though their profitability also declined.
After suffering huge losses in this war, the manufacturers took a wise decision to collectively solve this problem under the aegis of All Pakistan Cement Manufacturers Association (APCMA) in 2011. They joined hands and reduced their production up to the level at which they became at least profitable.
This prudency brought dividends for the manufacturers and they collectively pleaded their case for reducing excise duties and won rebate for exports. Hence, they once again became profitable in 2013.
Interestingly, efficient producers kept on innovating by exploring new markets for exports, adopting alternative fuels confronting energy crises and looking for state of the art techniques during this period.
Due to balance-of-payment difficulties in 2013, Pakistan adopted an Extended Fund Facility (EFF) under the IMF. Again, macroeconomic stabilisation took a front seat with belt tightening and focusing on reducing the fiscal deficit without deep rooted structural reforms. The recurrent crises of balance of payments are not allowing the governments to enhance Public Sector Development Program (PSDP). Despite decent budgeting for PSDP, the released amount has been slashed since 2013.
The recurrent balance of payment crises has been affecting the cement industry and its capacity utilisation is hovering around 73 to 77 % since 2009, the total dispatches remained range bound 31 to 35 million tonnes.
Although the cement industry became profitable owing to collective action in 2013, the demand side did not improve much owing to tight fiscal discipline adopted by the government. It has been witnessed that profitability without innovation make manufacturers laid back. They don’t invest in machines, men and materials.
It is high time that inefficient manufacturers should focus their energies and profits on investing in improving the production organisation, training the human resources and tapping new export markets. The cumulative exports of the industry declined from 11 million tonnes in 2009 to 7.2 million tonnes in 2015 due to lacklustre global demand and competition.
Finally, the cement manufacturers may expand their productive capacities in the post Extended Fund Facility (EFF) ie 2016 and positive developments on China Pakistan Economic Corridor front may tempt them to do so.
The writer is an Assistant Professor of Economics at Lums
Published in The Express Tribune, August 17th, 2015.
A flourishing cement industry is quite significant in a developing country’s economy, since its cumulative output growth is closely associated with economic growth.
The double digit output growth of the cement industry from 2002 to 2008 is the manifestation of stable economic growth in Pakistan.
The productive capacity expanded from 16 million to 38 million tons during this period which is unprecedented in the history of Pakistan. However, the industry has been weathering the storm since 2008 which requires an analytical lens.
The global financial crises brought a general economic slowdown across the globe. As a consequence, the external account deficit spiked to around eight percent of the GDP in Pakistan which put the economy in an inflationary spiral and brought it to knees.
Pakistan had to take a ‘standby agreement’ with the IMF owing to acute balance of payment crises from 2008-2011. As a consequence, macroeconomic stabilisation took a driving seat and the focus of the economic managers shifted to reducing fiscal deficit along with a tight monetary policy regime.
This combination of policies without meaningful structural reforms sapped the growth potential of economy. This tightening brought an economy wide slowdown which has affected the cement industry a great deal and a surplus production capacity of more than 10 million tonnes became a norm for the industry.
Usually, the manufacturers hate huge surplus capacities since their tied up fixed capital doesn’t bring any return for them. Under such abnormal circumstances, a few efficient manufacturers can produce at lower cost and are able to sell at a lower price.
This situation may spark a ‘price war’ among them. This is exactly what happened to the Pakistani cement industry, a ‘price war’ began in 2009 which ultimately brought huge losses for most cement manufacturers. However, a few efficient ones remained insulated from these losses though their profitability also declined.
After suffering huge losses in this war, the manufacturers took a wise decision to collectively solve this problem under the aegis of All Pakistan Cement Manufacturers Association (APCMA) in 2011. They joined hands and reduced their production up to the level at which they became at least profitable.
This prudency brought dividends for the manufacturers and they collectively pleaded their case for reducing excise duties and won rebate for exports. Hence, they once again became profitable in 2013.
Interestingly, efficient producers kept on innovating by exploring new markets for exports, adopting alternative fuels confronting energy crises and looking for state of the art techniques during this period.
Due to balance-of-payment difficulties in 2013, Pakistan adopted an Extended Fund Facility (EFF) under the IMF. Again, macroeconomic stabilisation took a front seat with belt tightening and focusing on reducing the fiscal deficit without deep rooted structural reforms. The recurrent crises of balance of payments are not allowing the governments to enhance Public Sector Development Program (PSDP). Despite decent budgeting for PSDP, the released amount has been slashed since 2013.
The recurrent balance of payment crises has been affecting the cement industry and its capacity utilisation is hovering around 73 to 77 % since 2009, the total dispatches remained range bound 31 to 35 million tonnes.
Although the cement industry became profitable owing to collective action in 2013, the demand side did not improve much owing to tight fiscal discipline adopted by the government. It has been witnessed that profitability without innovation make manufacturers laid back. They don’t invest in machines, men and materials.
It is high time that inefficient manufacturers should focus their energies and profits on investing in improving the production organisation, training the human resources and tapping new export markets. The cumulative exports of the industry declined from 11 million tonnes in 2009 to 7.2 million tonnes in 2015 due to lacklustre global demand and competition.
Finally, the cement manufacturers may expand their productive capacities in the post Extended Fund Facility (EFF) ie 2016 and positive developments on China Pakistan Economic Corridor front may tempt them to do so.
The writer is an Assistant Professor of Economics at Lums
Published in The Express Tribune, August 17th, 2015.