Stagnant cement exports

May 05, 2014

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A BUOYANT cement industry is quite significant in a developing country’s economy, since it is the backbone of the housing, construction and infrastructure sectors.

The double-digit output growth of the industry from 2002 to 2008 was closely associated with stable economic growth in the world in general, and in Pakistan in particular.

But the industry’s exports declined from around 11 million tonnes in FY2008-09 to 8.4 million tonnes in FY2012-13. The industry has been exhibiting stagnant or declining exports since 2009 on the following grounds.

First, the global financial meltdown brought a general economic slowdown across the world. It started with the ‘sub-prime’ mortgage crisis which ultimately affected housing construction and infrastructure projects in developed countries. House prices tumbled in the US, EU, and parts of the Middle East, and became stagnant in developing countries.

The huge monetary stimulus through quantitative easing brought about a recovery in housing prices in developed countries. And the recovery in developed economies is slowly translating into a pickup in economic growth in developing economies, and the demand for cement may go up.

Second, cement is a low value-added product, with the techniques and methods of its production being simple. This simplicity allows many developing country competitors to master the technology and join the export bandwagon. In times of general economic malaise, many countries start price competition in the export market and try to under-cut prices.

The industry cannot fetch higher foreign exchange during times of crisis owing to price competition and stagnant quantity demand in export markets. Despite innovations in Pakistan’s cement industry, the volume of exports is not increasing. The evidence is that quantitative cement exports in the first nine month of FY2013-14 declined around 2.5pc.

Third, lack of market diversification is another reason for low cement exports. Around 50pc of Pakistan’s cement exports go to Afghanistan — thanks to that country’s land-locked geography.

The reconstruction and rehabilitation efforts gave a phenomenal boost to cement exports to Afghanistan since 2003. But there was a double-digit decline in cement exports in the latest year due to elections in Afghanistan.

Although India is a big market for Pakistani cement, it is tainted by the trust deficit, which has resulted in non-tariff barriers.

In short, capacity utilisation of the cement industry has been hovering at around 72-74pc since 2008. This is the manifestation of lower domestic and stagnant export demand.

The government and the All Pakistan Cement Manufacturers Association should collaborate to tap into new export markets to utilise existing capacity. Here, the public policy should complement the private sector in achieving the desired objectives. The utilisation of existing capacity will also bring dividends in the form of lower domestic cement prices.