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profit.com.pk
Wednesday, 25 April, 2012
FAILING TO CEMENT PRICES
COMMENT
Not so out-of-the-box solutions
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Inflationary trends in Pakistan playing havoc with cement industry: Experts g Cement companies’ balance sheets are all over the place g Cumulative loss of cement units for last FY was Rs 5.681b g Steel prices fare no better g
LAHORE
A
STAFF REPORT
N exhaustive analysis of inflationary trends in Pakistan interestingly reveals that ex-factory prices of cement per bag have not increased in proportion to other construction industry inputs in the last ten years, which has rendered the balance sheets of most cement companies impaired and the industry has been recording huge financial losses. During the last financial year i.e. 20102011, 11 cement units suffered loss before taxation aggregating to Rs5.681 billion while 7 cement units, of which 2 are located near Karachi in close proximity to the sea port, earned profit of Rs5.982 billion. At the end of last fiscal, industry debts to financial institutions have risen to a massive
Rs125.3 billion and cement units located in the North are particularly challenged and are unable to service their debts. According to data compiled, the price of bricks has gone up by Rs 2,800 per 1,000 in just 6 months of the current fiscal, while it increased only by Rs 2,400 in the 10 year period from 2000 to 2010. The current price of 1,000 bricks is Rs 7,000 which was Rs 4,200 in the year 2010-11. While the price of the same number of bricks was Rs 1,800 in the year 2000 and reached Rs 4,200 by the year 2010. Similarly, steel prices have increased by Rs 6,000 per ton in just 4 years since 2007-08 and prices witnessed increase of Rs 30,000 in just one year from Rs 40,000 per ton to Rs 70,000 per ton from 2006-07 to 2007-08. Prior to this massive increase, steel prices increased on average by Rs 3,000 in the 7 year period from 2000 to
OVER-PROTECTED
On yer bike, mate! g
40 years and a lot of whining and unbounded volumes of confusion later, govt decides to withdraw protection from motorcycle industry LAHORE IMRAN ADNAN
he federal government has decided to open motorcycle manufacturing after a long protection of four decades as the Cabinet Committee on Investment (CCOI) has directed the Ministry of Commerce (MoC) to slash tariff for new entrants and Completely Built Unit (CBU). Official documents made available to Pakistan Today show that the tariff reduction decision was made in the recent CCOI meeting that instructed the MOC to
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2006. In addition to this, provincial tax on mining has been at the rate of Rs33 per ton for last three years, which was Rs18 in the financial year of 2008-09. This almost doubled in just one year. In the year 2000 it was Rs12 per ton and reached to Rs18 with the increase of Rs6 in the nine years from 2000 to 2008-09. There was an increase of Rs15 in just one year in the year 2009-10. The mentioning of input cost increase in packing prices would not be out of place here as it has witnessed the increase of Rs7.54 per bag in the last 4.6 years, while it had the increase of only Rs3.11 in 8 years from 2000-01 to 2007-08. Currently one bag costs Rs 20.65, and the price of one bag was Rs 13.11 in the year 2007-08, while it was just Rs 10 in the year 2000-01. This means the price of one bag doubled in ten yeaRs. In contrast to the above, ex-factory
cut tariff for new entrant and CBU. “The CCOI unanimously recommended tariff reduction for new entrants from 15 per cent to five per cent for five years duration and CBU from 65 per cent to 35 per cent”, and directed the MoC to move a summary to the CCOI accordingly. The MoC has prepared that summary as per direction, which would be submitted in the forthcoming CCOI meeting. Documents further indicate that a follow-up meeting of tariff rationalisation case of Motorcycle Project in Pakistan was held on 5th April 2012 in which representatives of motorcycle industry and committee members under the Chairmanship of Planning Commission Deputy Chairman participated. The chair inquired about the issues in the tariff rationalisation of motorcycle industry of Pakistan. The Chairman / Minister of State of Board of Investment (BOI) Saleem h Mandiwala pointed out that the high tariff rates were the main hurdle in attracting investment in the motorcycle industry in country. he suggested that there was need to rationalise these rates for new entrants. Similarly, the Deputy Chairman Planning Commission, Dr Nadeem-ul-haq observed that artificial barriers needed to be removed and no protection to local industry after long period of 40 years of its running “holistic approach pertaining to duty is required rather than imposition/reduction of duty on Components and Subcomponents”, he asserted. The National Tariff Commission Chairman in its presentation highlighted the background of the case and stated that earlier a meeting of the tariff rationalisation committee was held on January 18th, 2012, wherein it was decided that NTC in consultation with engineering Development Board (eDB) would conduct a study and put-forth the recommendations pertaining to rationalisation of
price of a cement bag was Rs179 in the year 2000-01 and now it stands at Rs370 by this financial year. Despite rapid increases in input costs, cement prices increased only by Rs 139 per one bag. The compounded annual growth rate of cement prices was 6.28% in the last ten years, which is well below the inflation rate. Besides all this, the devaluation of Pakistani rupee against the US dollar has played very negative role for the cement industry by dint of its heavy impact on almost everything. In the year 2000-01 one US dollar was costing Rs63, and now it is at Rs91. There was a devaluation of Rs5 in the 8 years from the year 2000-01 to 2007-08, but gained pace and the Pakistani rupee got devalued by about Rs23 in last 5 yeaRsOne dollar was at Rs68 in the year 2007-08 and now after 6 months of the current financial year it has reached to Rs91.
duty on Completely Knocked Down (CKD) and CBU within a month’s time. NTC after doing all the necessary procedures considered the following issues in consultation with major stakeholders: “Whether the domestic industry is adequately protected or the protection offered an industry is or the higher side; and “Whether the incentive in the existing scheme for new entrants are adequate or not? he further added that in-depth analysis of the issues revealed the following with regard to motor cycle industry in Pakistan: “The industry survived behind high tariff walls. however, due to lack of competition the industry could not be developed as an efficient industry and remained as a ‘negative value added industry’. This conclusion is true for both motorcycle industry and the vendor industry”. “Due to infinite protection, which at present is prohibitive for imports of parts as well as CBU motor cycles, manufacturers heavily depended on easy resulted into lack of research an, development and innovation”. “The Industry is as old as 40 years and no more a ‘nascent industry’. Therefore argument of nascent industry could not apply to the existing industry. It also cannot be argued that the industry could not achieve volume of production necessary or achieving the economies of scale”. “The protection of the vendor industry increased over time in-spite of trade liberalisation in other sectors, after the end of ‘Deletion Policy’ in 2005.
he president does have a calming effect of sorts about him. Be it addressing media frenzy about a (possible) flight to safety, or soothing upset business lobbies, his presence cannot be faulted for leaving too much unanswered for too long. So it was when he sat down with aptma the other day, their concerns about diminishing markets, decreasing exports and dilapidated production all settled in turn, quite amicably. And while energy shortage prompted a call to the petroleum minister, with promise of 5-day uninterrupted supply, the lower interest rate demand got a favourable nod as well. Very interesting. Simply put, aptma has two simple demands. (It has had them for some time actually!). ensure adequate energy and cheaper credit for the country’s largest industrial sector, 45 per cent non-farm labour force employer and 60 per cent export revenue contributor. And really that is about all it is in need of, for the time being. Two questions come up quickly. One, why did it take the president all the way till the end of the government’s term to realise the sector’s centrality to GDP growth (9 per cent)? Two, what did his spokesman really mean (Farhatullah Babar), quoting him, implying industry will needed “out of the box solutions” to grow and succeed and so on and so forth? As is evident by the demands, solutions needed are quite straight forward. Without energy, industry can and will not reach its production possibility frontier. And without credit, investment, both local and foreign, will not come. Plain and simple. Now all that needs doing is ensuring the 5-day uninterrupted supply promise is honoured, and restoring sanity to monetary policy. That, of course, will mean the government must overcome its addiction to cheap money, retreat from the money market, and stop crowding out private sector investment. Text-book really, nothing out-of-the-box about it.
There is a lack of policy for new entrants in motorcycle industry and they are heavily depended up on clones of ‘honda 70’ and Chinese parts only. The existing vendor base of the parts manufacturers helped the mushroom growth of copying assemblers but discouraged the research and development. It seems essential that existing manufacturer as well as new entrants be encouraged to carry out research and development and innovations”, document stated. In the light of the indepth analysis’, the NTC has recommended to maintain zero and 5 per cent tariff for raw material and subcomponent while tariff reduction to 5 per cent from 20 per cent for component and subassemblers.