The year that ended a few days ago was very eventful for the domestic cement sector as it witnessed very high prices, very low prices, cartel, then break-up of cartel, fights between manufacturers and importers, and most importantly the growth in size of the sector itself.
While the high prices from March to June and July gave headaches to builders, the low prices did the same to the manufacturers from August onwards. The year started with cement, the most essential building material, selling between Rs250 and Rs275-280. The prices began to rise in March and in April they had peaked to Rs400. Then the government came in action at last and decided to provide subsidies on import of cement and allow it from India as well.
Although the cement that was imported into the country subsequent to this decision was too little in quantity to actually disturb the price situation, the decision had its psychological effects and brought the prices down to normal levels in July. The manufacturers cried foul on this decision and urged the government to withdraw it.
The manufacturers had strong arguments against the import decision. They stated that the cement industry was undergoing expansion, after which it would be able to meet the increased demand and there would be no requirement for imports. They also said the government should withdraw either sales tax or excise duty to bring the consumer price down. That seemed to be a very strong argument, as the government receives 15 per cent sales tax and Rs37.5 in excise duty, which makes the product even more expensive for the ordinary man.
Then the importers faced difficulties in getting their consignments cleared and they accused the manufacturers of using their influence in the bureaucratic quarters to hinder smooth clearance of imports. The cement-makers were also accused of threatening sack-manufacturers against supply to traders who had imported the cement in bulk.
But only the decision to allow import could not have brought the cement to current lows. It was the expansion of capacity undertaken by the major manufacturers and resultant break-up of the much-criticised cartel that caused the prices to plunge to Rs170 in some areas of the country and around Rs200 in others. As the new cement units, set up by the majors of the sector, started production, one after another, the prices kept declining.
Pakistan annually requires 22Mt of cement, but the capacity expansion has taken the production far beyond that figure, leading to stiff competition between the producers. The production is likely to reach 39Mt by 2008.
The export of cement to Afghanistan and some countries of Middle East continued with a record performance in July. The country is likely to sell its surplus cement to these countries, if Iran does not grab our markets. The government must facilitate the exporters in keeping their markets, as cement has the potential to become a large foreign exchange earner for the country.
The cartel met its demise after fleecing the consumers for many years. While this has brought relief for the consumers, who have got no other relief during the year because of the soaring inflation, it has made the survival of the small cement units difficult. They were operating happily under the cartelised industry, but in a competitive environment they are highly unlikely to survive. Already unconfirmed reports have been received of closure of some small units after they had made losses. This creates concerns for the jobs of the people that were employed by these units.
The stock market analysts are speculating in their reports that an arrangement would be in place by the end of current fiscal year and the cement prices will stabilise. These guys always side with the capitalists and not the consumers.