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Impact of COVID-19 on Pakistan's Cement Industry

The COVID-19 pandemic has severely impacted Pakistan's cement industry. Sales have dropped from 160,000 tons per day to 35,000 tons due to plant closures and reduced economic activity. This is resulting in losses of $8.6 million per day for the industry and $2.5 million per day in lost taxes for the government. The pandemic may cause a recession that lasts over a year. The cement industry faces challenges of high debt levels, increased costs from currency devaluation, and reduced export markets as other countries also face lockdowns. The government has taken some steps to provide economic relief, but the cement industry losses could reduce GDP growth by 2-2.5% over the next 6-12 months.

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Abdullah Saleem
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20 views3 pages

Impact of COVID-19 on Pakistan's Cement Industry

The COVID-19 pandemic has severely impacted Pakistan's cement industry. Sales have dropped from 160,000 tons per day to 35,000 tons due to plant closures and reduced economic activity. This is resulting in losses of $8.6 million per day for the industry and $2.5 million per day in lost taxes for the government. The pandemic may cause a recession that lasts over a year. The cement industry faces challenges of high debt levels, increased costs from currency devaluation, and reduced export markets as other countries also face lockdowns. The government has taken some steps to provide economic relief, but the cement industry losses could reduce GDP growth by 2-2.5% over the next 6-12 months.

Uploaded by

Abdullah Saleem
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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COVID’19/20 effects on Cement Industry in Pakistan

Submitted by: Abdullah Saleem 15223

According to a recent World Bank report, Pakistan may be in a recession, for the
first time when the country ended immediately after its creation. The bank also
warned that the economy could shrink by 2.2% and that expected national
production could reach 1.3% with a sharp drop in per capita income. For Pakistan,
closing the country is a very complicated option to avoid the health crisis since
around 39 million people are below the poverty line. Long closures of the
coronavirus can increase food insecurity, malnutrition and poverty in marginalized
sectors of society that are daily punters, mainly workers and workers.
Due to this pandemic Pakistan can face an economic recession for a year or even
more than that. The longer this lockdown gets the more long lasting will be the
effects of recession. Government is indeed taking actions to have some control
over the issue. We need to understand that what government can do is to only
moderate and cushion down the impact of this pandemic. The whole world is
facing crises and the problem is much bigger than it can be seen. The financial
cross over is to hang for years even after we get rid of this. This directly transfer
impact to industries, the most active industry is therefore most threatened in the
market. Cement sector is no exception, 11 out of 25 plants are completely shut
down whereas the other 14 are at partial shutdown.
The overall sales of the country has been dropped from 160,000 tons per day to
35,000 tons per day, calculating to the loss of US $ 8.6 million per day. Apart from
this the government is facing another loss in the form of taxes. As government is
collecting lower taxes it faces a loss of US $ 2.5 million per day. These losses are
bound to happen until the lockdown ends.
The losses will continue as the post Covid’19 effect. As in the Holy month of
Ramadan and then Eid holidays which will be followed by the monsoon season, all
this will end by August. These low activity in the cement industry will be very
difficult to cope up with.
The expansion of the cement plant requires a lot of finance. The ones who
expanded their plant in the last 6-12 months will face several challenges in the
form of higher interest charges which will consequently come out as an overvalued
cost of the expansion. Increase in cash flow will also lead to repayment of huge
debt liabilities.
Recently 7% devaluation of currency was announced, this will have a very
negative effect as it will directly impact on the profitability of the company. This
will incre1.5ase the cost of the project too.
It is being anticipated that the cement industry could face a collective debt burden
of US $ 1.5 billion, furthermore the surplus capacity of 30 million tons. This will
be the biggest challenge for the cement industry, coping up from here will not be
that easy as it may consume next 6-12 months. Cement industry loss will directly
hit the GDP, calculation suggests GDP may reduce by 2-2.5% in the next 6-12
months.
Coming to the export market, two of the major export market for the cement
industry Sri Lanka and Bangladesh have also been facing lockdown situation. They
accounted for almost 80% of the exports of cement from Pakistan, parking of these
quantities that were usually exported will also be a threat to the industry.
However there have massive price reduction in the oil prices, which might be a big
relief for the government of Pakistan. They have also provided the fiscal space that
will lead managers of the country to give relied to these industries and commercial
sector of Pakistan. In addition to this government has also announced some
economic activities that will provide stimulus economic package to the export
sector and have also announced further incentive in favor of the sector.
Cement sector is amongst the leveraged sectors in Pakistan, the names PIOC
BWCL, MLCF, CHCC are in high debts. Therefore there have been a cut in
interest rates from 13.25% to 11% that will cushion down some effect of this
pandemic.
Going through my research I found a statement from All Pakistan Cement
Manufacturers Association (APCMA) Chairman Azam Faruque said “it is safe to
assume that there will be a significant reduction in demand, but a lot will depend
on the lockdown scenario; demand may surge if the markets are opened early”.
He also informed the domestic demand for the current fiscal year was recorded
27.374 million tons, whereas exports clocked in at 5.939 million tons leaving back
a surplus of 8.934 million tons. He also claimed that the industry is amongst the
highest contributors to the national treasury. Currently the FED (federal excess
duty) charged is Rs2,000 per ton, he urges government to reduce the FED to zero
as it will encourage infrastructure development in the county. This abolishment
will not only remove the culture of tax invasion but will also increase cement
consumption at reduced prices.
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The Pakistani cement industry is expected to face significant challenges due to economic downturn, including a potential collective debt burden of US $1.5 billion and a surplus capacity of 30 million tons. This surplus is likely due to decreased domestic and export demands, as major export markets like Sri Lanka and Bangladesh are also in lockdown. These issues may lead to a reduction in GDP by 2-2.5% over the next 6-12 months as the cement industry is a vital contributor to the economy .

The government's fiscal responses, such as economic stimulus packages and incentives for exporting sectors, could facilitate recovery by increasing liquidity and spurring domestic demand. However, since Sri Lanka and Bangladesh account for almost 80% of Pakistan's cement exports and are currently facing lockdowns, the effectiveness of these responses might be limited internationally. The ability to reopen and stabilize export markets will be crucial for the timely recovery of the cement industry .

The cement industry is a critical contributor to Pakistan's economy, substantially affecting national GDP and employment. Challenges faced by this industry, such as production decline and debt burdens, can have a ripple effect on related sectors like construction and manufacturing, leading to broader economic downturns. The industry's struggle may also impact fiscal revenues due to reduced tax collection, thereby limiting government spending capacity on infrastructure and social services .

To mitigate financial risks, Pakistani cement companies might focus on cost-cutting measures, renegotiate debts and loans, and seek alternative markets to offset decreased exports to Sri Lanka and Bangladesh. Diversifying their product lines and investing in technological upgrades to enhance efficiency could also be advantageous. Strategic partnerships and governmental lobbying for reduced taxes and incentives might further help in cushioning the pandemic's impact .

The reduction in oil prices can increase the fiscal space by lowering the government's import bill, thus providing more resources to support industries impacted by the pandemic. With this increased fiscal space, the government could potentially implement subsidies or tax breaks for the cement industry, enhancing its financial resilience. Reduced energy costs could also lower production costs, indirectly benefiting cement manufacturing .

The 7% devaluation of the Pakistani currency increases the cost of importing machinery and materials required for cement projects, thereby raising overall project costs and reducing profitability. For companies that have expanded their plants in the last 6-12 months, this devaluation exacerbates financial strain by inflating existing debt obligations and interest costs. The reduced profitability might deter future investment and expansion efforts .

The reduction in interest rates from 13.25% to 11% provides some relief to highly leveraged cement companies, as it lowers the cost of borrowing and could help manage their debts during the economic slowdown. In the long term, such monetary policy adjustments could support debt servicing but might not completely offset the financial pressure if demand remains low. Additionally, continuous reliance on low-interest rates might lead to increased borrowing, potentially exacerbating financial vulnerability .

Reducing or eliminating the FED on cement could decrease production costs, leading to lower prices for consumers. This price reduction might encourage more infrastructure projects and increased consumption, thereby boosting the overall economic activity. Azam Faruque, chairman of APCMA, suggests that such measures could also reduce tax evasion and increase governmental revenue through heightened economic activity .

A surplus capacity of 30 million tons implies that production significantly exceeds demand, leading to lower prices and reduced profitability. To balance this excess, the industry might consider scaling down production temporarily or seeking alternative markets or uses for the surplus product. Strategic alliances to export surplus or investing in domestic infrastructure projects could help absorb the excess capacity .

Seasonal variations such as Ramadan, Eid, and monsoons traditionally result in reduced construction activities, posing additional challenges to the recovery of the cement industry post-COVID-19. These events coincide with potential easing from lockdowns, thus compounding the issues of demand recovery as economic activities remain subdued during these periods. The delay in increased construction activities might prolong the financial recovery trajectory for the sector .

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