The Pakistan government has proposed a number of measures in its 2011-12 Federal Budget (July 2011 - June 2012) which are expected to aid the local cement industry. Pakistan’s Federal Minister for Finance Dr Hafeez Sheikh presented the federal budget and outlined salient features during a speech in the National Assembly on 3 June.
He proposed that federal excise duty (FED) on cement will be phased out in three years. A reduction of PKR200/t is proposed in the first year budget 2011-12 and further reductions of PKR500/t in the next two budgets will follow bringing FED to zero. He announced that as promised, there will be no extension of one-off taxes levied due to floods: 15 per cent surcharge on income tax and 1.5 per cent increase in special excise duty. The government raised Special Excise Duty (SED) on cement, cigarettes and beverages from 1.0% to 2.5% in Mar 2011 applicable from Mar 16, 2011. Sales tax has been reduced from 17% to 16% with the intent of further reductions in the future.
The minister announced allocation of PKR730bn (US$8.58bn) for development of projects mainly in water, power and transport and communication sectors. Out of which, the government has allocated PKR33.2bn for the completion of the Mangla Raising, Satpara Multipurpose Dam (Gilgit-Baltistan), Gomalzam (FATA), Kachhi Canal (Balochistan), Rainee Canal (Sindh), Lower Indus Right Bank Irrigation and Drainage Sindh, (Balochistan) Effluent Disposal into RBOD, Extension of Right Bank and out fall Drain from Sehawan to Sea, lining of Distributaries and Minors in Sindh.
The second most significant allocation in the infrastructure has been accorded to power generation to overcome supply gaps. Some PKR32.5bn is planned for power generation, transmission, distribution and conservation. In the power sector many important projects are included in the plan: Diamir Bhasha Dam (PKR18b), Neelum Jhelum Hydro Project of 1000 MW (PKR 10.8 b), Guddu Combined Cycle Power Project of 747MW (PKR 14.6b) and Chicho ki Malian Thermal Power Project 525 MW (PKR 13.9 b). In addition, nuclear power projects such as C-3, C-4 with a capacity of 600MW are also being implemented and PKR15.5bn are allocated. In the transport and communication sector, PKR50bn has been allocated. Of this, PKR36bn is for the National Highways Authority (NHA) and PKR15bn for railways.
Analysts at Invest & Finance Securities and AHCML Research, have said the FY12 Budget has proved to be highly positive for the cement sector with a number of tax reliefs and the hope of increasing construction development. The reduction in sales tax, slashing of Special Excise Duty (SED) and phasing out of Federal Excise Duty (FED) will help curtail input costs thereby boding favourably for the sector’s margins. The ease in FED may also be a step towards controlling the price of cement which has reached PKR400/bag.
On the negative side, one analyst at Invest & Finance Securities pointed out power tariffs have been raised by two per cent every month. However, this may not hurt the key cement players who have been running Waste Heat Recovery plants but may impact smaller cement companies’ margins who are finding it hard to breakeven currently.