SECTOR OVERVIEW

Pakistan CEMENT SECTOR

JCR-VIS RESEARCH
March 2017
 TABLE OF CONTENTS

6 Key Characteristics
7 Sector Snapshot
8 Cement Manufacturing Process
10 Environmental Impact of Cement Production
11 Global Cement Production
13 Snapshot of Pakistan’s Cement Sector
14 Per Capita Cement Consumption
15 Location of Cement Companies
 TABLE OF CONTENTS

16 Marketing Arrangement
17 Industry Production Capacity
18 Existing Capacity & Expansion (North)
19 Existing Capacity & Expansion (South)
20 Rationale for Expansion
21 Industry Capacity Utilization
22 Capacity Utilization (North)
23 Capacity Utilization (South)
 TABLE OF CONTENTS

24 Sales Mix - Local vs. Export

25 Risk profile of the Industry
28 Financial Profile of the Industry
29 Gross Margin Drivers of the Industry
31 Gross/Net Margins of Key Players
32 Borrowing Profile of the Industry
 CEMENT SECTOR:
GLOBAL PROFILE
JCR-VIS Credit Rating Company Limited
Global Cement Sector
KEY CHARACTERISTICS
A capital intensive industry
The cost of cement plants is usually above $ 160M per million tones of annual capacity, with correspondingly high
costs for modifications. The cost of a new cement plant is equivalent to around 3 years of turnover, ranking it as
one of the most capital intensive.

Energy intensive industry

Each tonne of cement produced requires 60 to 130 kg of fuel oil or its equivalent, depending on the cement variety
and the process used, and about 110 KWh of electricity. Energy on average constitutes around 40-60% of
operating expenditure.

An Industry with homogenous products

Although produced from natural raw materials which vary from plant to plant, cement can be considered a
standard product - there are only a few classes of cement.

Market parameters
Consumption of cement is closely linked to both the state of economic development in any given country or
region and to the economic cycle.

Logistics and distribution network

Heavy reliance on logistical support and distribution network to function.

Raw Materials
The raw materials needed to produce cement (calcium carbonate, silica, alumina and iron ore) are generally
extracted from limestone rock, chalk, clayey schist or clay.
.
JCR-VIS Credit Rating Company Limited
Global Cement Sector
SECTOR SNAPSHOT

Types of Cement: The cementing

Material is generally classified into 2 category: Competitive landscape and key vendors 2016
Hydraulic (e.g. Portland Company Capacity
1. LafargeHolcim (Switzerland) 286.66 mt/year
Cement: set and become 2. Anhui Conch (China) 217.2 mt/year
adhesive due to a chemical 3. CNBM Sinoma (China) 176.22 mt/year
reaction between the dry 4. Heidelberg (Germany) 121.11 mt/year
ingredients and water. 5. CEMEX (Mexico) 87.09 mt/year
6. Italcementi (Italy)
The global cement industry 76.62 mt/year
7. China Resource (China)
Non – Hydraulic: will not set in 71.01 mt/year
wet conditions or underwater; iscompetitive and 8.
9.
Taiwan Cement (Taiwan)
Eurocement (Russia) 63.72 mt/year
rather, it sets as it dries and reacts contains numerous 10. Votorantim (Brazil) 45.18 mt/year
with carbon dioxide in the air. It is global and 45.02 mt/year
resistant to attack by chemicals
after setting.
regional players

Current Global cement production in 2016

Cement production Global Employment

4.6+ 545,000+
employees (Cement
Billion Tons
& Concrete)

1960 1980 2000 2020

JCR-VIS Credit Rating Company Limited
Global Cement Sector
CEMENT MANUFACTURING PROCESS

STAGE I: QUARRY
dumper
loader

Quarry face
1. BLASTING: The raw materials that are used 2. TRANSPORT: The raw materials are loaded into a dumper.
to manufacture cement (mainly limestone and
clay) are blasted from the quarry.
storage at
crushing the plant
conveyor

3. CRUSHING & TRANSPORTATION: The raw materials, after crushing, are transported to the plant by conveyor. The plant stores the
materials before they are homogenized.

STAGE II: RAW GRINDING AND BURNING

storage at
Raw mill
the plant
conveyor Raw mix

4. RAW GRINDING : The raw materials are very finely ground in order to produce the raw mix.

preheating

kiln
cooling
clinker

5. BURNING : The raw mix is preheated before it goes into the kiln, which is heated by a flame that can be as hot as 2000 °C. The raw mix
burns at 1500 °C producing clinker which, when it leaves the kiln, is rapidly cooled with air fans. So, the raw mix is burnt to produce clinker : the
basic material needed to make cement.
JCR-VIS Credit Rating Company Limited
Global Cement Sector
CEMENT MANUFACTURING PROCESS

STAGE III: GRINDING, STORAGE, PACKING, DISPATCH

clinker Gypsum and the secondary additives are

added to the clinker.
storage
Finish
grinding
6. GRINDING: The clinker and the gypsum are very finely grounded giving a “pure cement”. Other secondary additives and cementitious materials
can also be added to make a blended cement.

silos
dispatch
bags

7. STORAGE, PACKING, DISPATCH: The cement is stored in silos before being dispatched either in bulk or in bags to its final destination.

Source: http://www.lafarge.com/en
JCR-VIS Credit Rating Company Limited
Global Cement Sector
ENVIRONMENTAL IMPACT

The production of cement releases greenhouse gas emissions both directly and indirectly:
• The direct emissions of cement occur through a chemical process called calcination,
which occurs when limestone (made of calcium carbonate,) is heated. This process
accounts for ~50% of all emissions from cement production.
• Indirect emissions are produced when fossil fuel is burned to heat the kiln. Kilns are
usually heated by coal, natural gas, or oil, and the combustion of these fuels produces
additional CO2 emissions. This represents around 40% of cement emissions.
• Finally, the electricity used to power additional plant machinery, and the transportation
of cement, represents another source of indirect emissions and account for 5-10% of
the industry’s emissions.
Source: http://blogs.ei.columbia.edu/2012/05/09/emissions-from-the-cement-industry/

ORIGINATION OF CEMENT RELATED GREENHOUSE GASSES (GHG)

Cement industry accounts for 5% of global greenhouse gasses (GHG):
Calcination process, which occurs when limestone (made of calcium
carbonate) is heated ~ (about 50%)

Combustion of fossil fuel required to make electricity ~ (5%)

Transport activities ~ (5%)

Fossil fuel combustion at cement manufacturing operation ~ (40%)

JCR-VIS Credit Rating Company Limited
Global Cement Sector
GLOBAL PRODUCTION

Source: http://www.cembureau.be/about-cement/key-facts-figures
PAKISTAN CEMENT SECTOR:
OVERVIEW
JCR-VIS Credit Rating Company Limited
Pakistan’s cement sector
SNAPSHOT OF PAKISTAN’S CEMENT SECTOR

5.8+
Rs. 250+ 38+
Million tons of
export of cement &
Billion Sales
Million tons of Clinker
dispatches
Operational capacity

44+
24 players 140 kg Million tons Clinker

Operating in the Per Capita

Consumption
46+ Million tons
industry Cement
JCR-VIS Credit Rating Company Limited
Pakistan’s Cement Sector
COMPARATIVE ANALYSIS OF PER CAPITA CEMENT CONSUMPTION

World Average Cement Saudi Arabia, 1,683

Consumption:
400 Kg per Capita (2016)

China, 1,581

Turkey, 744

USA, 232

Pakistan, 140 India, 225

JCR-VIS Credit Rating Company Limited
Pakistan’s Cement Sector
LOCATION OF CEMENT PLANTS

North
Location of • There’re 19 cement units operating in
North.
Cement Plants –
• North Zone includes provinces of Punjab,
Marked Red Khyber Pakhtunkhwa, Azad Kashmir,
Gilgit-Baltistan and parts of Balochistan
North while South Zone includes provinces of
Sindh and Balochistan.

South
• There’re 5 cement units operating in
South zone.
• South Zone comprise provinces of Sindh
and Baluchistan.
JCR-VIS Credit Rating Company Limited
Pakistan’s Cement Sector
MARKETING ARRANGEMENT

 The industry operates under a marketing

arrangement whereby there is understanding
on pricing between cement players and a
quota is assigned to each player based on
installed capacity.
 The arrangement is rewritten based on
additional capacities that come online.
 The marketing arrangement has matured
considerably and has been a key element of
cement sector profitability.
 JCR-VIS believes that players with higher
efficiencies and presence & access to export
markets will be able to remain competitive in
the absence of marketing arrangement.
JCR-VIS Credit Rating Company Limited
Industry Production Capacity
INDUSTRY PRODUCTION CAPACITY

Top 10 Players In the Cement Industry

Others, 17%
GharibWal Cement Limited , Bestway Cement, 17%
4%

Cherat Cement Company

Limited, 5%

Lucky Cement Limited , 16%

Kohat Cement Company

Limited , 6%

Askari Cement Limited , 6%

DG Khan Cement, 9%

Dewan Cement Limited, 6%

Fauji Cement, 7%
Maple Leaf, 7%

Operational Capacity (2016) Projected Capacity (2021)

46.9m Tons 72.4m Tons

JCR-VIS Credit Rating Company Limited
Existing Capacity & Expansion (North)
COMPANIES & EXPANSION PLANS IN THE CEMENT SECTOR (NORTH) – CAPACITY GIVEN IN MILLION TONS
EXISTING CAPACITY IN CEMENT SECTOR (2016)
Cherat Cement
D.G.Khan Cement
Bestway Cement 6%
11%
21%
Pioneer Cement
5%

-) Players – 14
Lucky Cement
Others
25%
10% -) Operational Capacity – 38m
Tons
Gharibwal Cement
6%
Maple Leaf
Cement Kohat Cement
9% 7%

AFTER CAPACITY EXPANSION (2021)

Cherat Cement,
Bestway Cement, 8% D.G.Khan
18%
Cement, 11%
-) Players – 14
Pioneer Cement,
Others, 19% 8% -) Operational Capacity – 56m
Tons
Lucky Cement,
-) Additional capacity
11% represents 47% of existing
capacity
Maple Leaf Gharibwal
Cement, 10% Cement, 8%
Kohat Cement, 9%
JCR-VIS Credit Rating Company Limited
Existing Capacity & Expansion (South)
COMPANIES & EXPANSION PLANS IN THE CEMENT SECTOR (SOUTH) – CAPACITY GIVEN IN MILLION TONS
EXISTING CAPACITY IN CEMENT SECTOR
Thatta Cement
6%
Deewan Cement
20% Lucky Cement
42%

-) Players – 5
-) Operational Capacity – 8.5m
Tons
Attock Cement
21%

Power Cement
11%

AFTER CAPACITY EXPANSION IN 2021

Thatta Cement
Deewan Cement 6% D.G.Khan Cement
10% 16%
-) Players – 6
-) Operational Capacity –
Attock Cement
18% 16.4m Tons
-) Additional capacity
Lucky Cement represents 93% of existing
30%
capacity
Power Cement
20%
JCR-VIS Credit Rating Company Limited
Expansion Plans
RATIONALE FOR EXPANSION

 Barring few small players, almost all cement players have announced expansion.
 Rationale for expansion includes
 Favorable demand outlook
 Retain market share
 Compete in terms of efficiencies
TIMELINE OF EXPANSION PLAN
Expansion in South
Expansion in North
JCR-VIS Credit Rating Company Limited
Capacity Utilization
CAPACITY UTILIZATION IN PAKISTAN’S CEMENT SECTOR –MILLION TONS
50 100%
45 90%
40 80%
35 70%
30 60%
25 50%
20 40%
15 30%
10 20%
5 10%
- 0%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Production Capacity Total Dispatches Capacity Utilization Linear (Capacity Utilization)

DISPATCHES IN PAKISTAN'S CEMENT SECTOR – SALES GIVEN IN MILLION TONS

45
CAGR dispatches over the last
40 10 years @ 7.68%
35
30
25
20
15
10
5
-
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Local Dispatches Exports Total Expon. (Total)
JCR-VIS Credit Rating Company Limited
Capacity Utilization (North)
CAPACITY UTILIZATION (NORTH) –MILLION TONS
45 82%
40 80%
35 78%
30 76%
74%
25
72%
20
70%
15 68%
10 66%
5 64%
0 62%
FY12 FY13 FY14 FY15 FY16
Production Capacity Total Dispatches Capacity Utilization Linear (Capacity Utilization)

PROJECTED CAPACITY UTILIZATION (NORTH) –MILLION TONS

Dip in capacity utilization to 73% in FY20, as capacity
70 expansion by a number of player comes online 100%
90%
60
80%
50 70%
40 60%
50%
30 40%
20 30%
20%
10
10%
0 0%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
Production capacity Export Sales Total Sales Capacity Utilization Linear (Capacity Utilization)
JCR-VIS Credit Rating Company Limited
Capacity Utilization (South)
CAPACITY UTILIZATION (SOUTH)–MILLION TONS
Dewan Cement increased capacity in FY16,
9 which contributed to dip in capacity utilization 100%
8 98%
7
96%
6
5 94%
4 92%
3
90%
2
1 88%
0 86%
FY12 FY13 FY14 FY15 FY16
Production Capacity Total Dispatches Capacity Utilization Linear (Capacity Utilization)

PROJECTED CAPACITY UTILIZATION (SOUTH)–MILLION TONS

Dip in capacity utilization to 65% in Further dip in capacity utilization to 62%
FY18, as APCL, DGKC and Lucky in FY20, as Power Cement expansion
18 100%
expansion come online comes online
16 90%
14 80%
70%
12
60%
10
50%
8
40%
6
30%
4 20%
2 10%
0 0%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24
Production capacity Local Sales Export Sales Total Sales Capacity Utilization Linear (Capacity Utilization)
JCR-VIS Credit Rating Company Limited
Sales Mix
SALES MIX - LOCAL VS. EXPORTS

 Increasing proportion of local sales due to favorable

FY
16 demand dynamics.
FY  Imposition of anti dumping duty on exports to
15
South Africa along with slowdown in dispatches to
FY
14 Afghanistan has resulted in declining exports.
FY  Emerging export markets now include Sri Lankan
13 and African Markets.
FY
12

0% 20% 40% 60% 80% 100%

Exports Local

BREAKUP OF LOCAL SALES - MILLION TONS BREAKUP OF EXPORT SALES - MILLION TONS
30 8

25 7
6
20
5
15 4

10 3
2
5
1
0 0
FY11 FY12 FY13 FY14 FY15 FY16 FY11 FY12 FY13 FY14 FY15 FY16
North South North South
JCR-VIS Credit Rating Company Limited
Risk Profile
BUSINESS RISK
 Business risk profile of the sector is supported
by:
1. Healthy demand outlook due to
infrastructure and housing projects
2. Mature marketing arrangement resulting
in:
 Strong pricing power (increase of Rs.
34/bag passed to consumers due to
change in FED regime)
 Pass through of increase in cost
 Lower fuel and power cost supported by declining FO and coal prices. Recent increase in
coal prices is expected to be passed to consumers
3. Capacity expansion to further improve efficiencies and margins
JCR-VIS Credit Rating Company Limited
Risk Profile
RISK FACTORS

A. Lower than projected growth in demand due to adverse

developments on CPEC front and delay in infrastructure
projects
B. Collapse of marketing arrangement. Industry players
believe chances of the same are remote due to capital
commitment of key players and planned closure of
inefficient lines.
C. Inability to pass significant increase in input prices
D. Declining exports
E. Taxes and regulatory duties
PAKISTAN CEMENT SECTOR:
FINANCIAL ANALYSIS
JCR-VIS Credit Rating Company Limited
Financial Performance
FINANCIAL PROFILE FOR THE OUTGOING YEAR

 Financial profile of the sector has posted notable improvement across all key parameters including profitability,
liquidity and capitalization.
 Key reasons for the improved performance has been growth in dispatches and improved gross margins.
 Decline in coal and furnace oil prices has also facilitated in improved gross margins

300,000 90.0 1.20

Sales: 5-year sales CAGR of 15.0% 1.09 Median gearing of the 83.6
Profit before Tax (PBT): 5-year CAGR of 101.5% .. 80.0 sector has declined
250,000 1.00
from1.09x at-end’2011 to
70.0
0.18x at-end’2016
200,000 60.0 61.0 0.80
57.3
0.63
50.0 48.3
150,000 0.60
40.0
100,000 0.39
30.0 0.31 0.40

20.0 0.22
50,000 17.3 0.18
0.20
10.0
-
- 1.7 0.00
2011 2012 2013 2014 2015 2016
2011 2012 2013 2014 2015 2016
Sales PBT FFO/Total Debt Gearing
JCR-VIS Credit Rating Company Limited
Gross Margin Drivers
CRITICAL DRIVERS OF PERFORMANCE FOR CEMENT SECTOR

Level 1 Level 2 Level 3 Value Drivers

Assigned quota based

Cement dispatches
on installed capacity

Pricing arrangement
Retention price
between key players
Gross margin
drivers Raw/packaging
Cement Dispatches
material

Efficiency of cement
plant
Cost of Sales
Cost of input (i.e.
Cost of fuel & Power
coal, gas etc)

Plant capacity
Salaries & wages
utilization
JCR-VIS Credit Rating Company Limited
Gross Margin Drivers
CRITICAL DRIVERS OF PERFORMANCE FOR CEMENT SECTOR

Main gross
margin drivers

Capacity • Cost of fuel and power is the single largest component representing around half of cost of sales.
Utilization
• Power cost is dependent on efficiency of cement plant, cost of input prices (coal, gas, FO or grid)
and capacity utilization.

Retention Prices Efficiency ..

• Efficiency of cement plant is a function of Kcal coal consumption per kg of clinker and electricity
consumption in KWh per ton of cement.

• For top-tier players, coal consumption is around 800 Kcal per kg of clinker and electricity consumption
is 100 KWh per ton of cement, respectively.

Cost of fuel and • Expansion will result in better efficiencies given the lower electricity and coal consumption of new
Power plants.
JCR-VIS Credit Rating Company Limited
Industry Gross/Net Margins
GROSS MARGIN (%)
60
50
40
30
20
10
0

FY16 FY15

NET MARGIN (%)

35
30
25
20
15
10
5
0

FY16 FY15
JCR-VIS Credit Rating Company Limited
Risk Profile
BORROWING PROFILE
 Borrowings undertaken by cement manufacturers are
a function of working capital requirements and to fund
expansion.

 With business in the South Zone being undertaken

largely on cash basis with major portion of sales to large
dealers, working capital requirements are limited for
players in the South Zone vis-à-vis the North Zone
where sales are largely on credit terms.

 Despite expected increase in borrowings to fund

expansion, gearing levels are expected to remain within
manageable levels on account of sizeable retained
earnings.