Logic behind under-utilising cement capacity

The Pakistani cement sector is underutilising its expanded capacity by a great margin in order to prevent a supply glut and a likely price plunge, dealers said. They said the cement sector had a capacity of produc ng 21Mt annually before the manufacturers began expansion projects more than one and a half years ago. Although their capacity has now risen to over 32Mt, their sales including exports stood at 17.48Mt in the first nine months of the current fiscal. If they continued with their current pace, they would be able to produce 22.74Mt by the end  of this financial year. They could have produced 9.5Mt more, which they did not.

The manufacturers might argue that their capacity was not at this level when this financial year started, but the fact is their capacity was at least around 26Mt around July last year because a large number of expansion projects had already come on stream. This capacity gradually increased through the year to over 32Mt. Some say their capacity is 34Mt currently.

The manufacturers have been using the rising exports as a pretext for sending prices in the local market through the roof, but that too is unjustifiable because exports have not risen commensurate to expansion in the production capacity. While there has been an increase of 10Mt capacity in the cement-making sector, the exports stood at only 2.1Mt in the first nine months – dealers claim.

On the other hand if cost and price is taken into consideration, it is true that the cost of some of the small companies is around Rs 200 per 50-kg bag including sales tax and central excise duty. However, the cost of large manufacturers is much below, standing at around Rs 175 per bag. They are currently selling their product at prices between Rs220 and Rs240. How could they justify that?