CPEC has become a major attraction for domestic as well as foreign investors

Published on 15th Feb, Edition 7, 2016

 

Cement, steel, other industries set to grow

The China-Pakistan Economic Corridor (CPEC) has become a major attraction for domestic as well as foreign investors who see this project as catalyst for Pakistan to grow its economy at a pace achieved by leading regional peers.

Soon after the launch of the project, some major business groups have already invested in expanding their production capacity of such materials as cement, steel, electric cables and glass that they expect will be in huge demand as work on the CPEC projects moves ahead at a faster pace in the months to come.

In this regard, there are examples of the Nishat Group, which is setting up a cement plant in Balochistan and the Lucky Cement in Punjab. The Younus Brothers, owner of Lucky Cement, is also establishing a coal power plant in Karachi. Likewise, a Lahore-based electric cable manufacturer — Fast Cables — has expanded its manufacturing facility to meet the future demand of CPEC-linked projects and is planning to boost it further and a Peshawar-based investor is said to have shown interest in setting up a steel plant near Lahore. A Steel Mills in Karachi, which is said to be the major supplier of steel for the Lahore Orange Line Metro Train project, is also planning to expand its capacity.

Financial experts told PAGE that the CPEC is not only attracting domestic investors but also foreign capital. The Lahore Orange Line Metro Train project is a gift of China and the Chinese are providing resources for the project. They added that the CPEC implementation will turn Pakistan into the centre of global economic activities. The CPEC is golden opportunity for Pakistan to get out of vicious cycle of low growth and improve the lives of its people, they opined.

It may be noted that Pakistan remains one of the slowest growing South Asian economies for the last several years despite being the second most populated country after India. Pakistan’s economy is estimated by the World Bank to expand by just 5.5 percent during the calendar year 2016. On the other hand, growth in India is expected to speed up to 7.7 percent, Bhutan 7.2 percent, Bangladesh to 6.8 percent and Sri Lanka to 5.6 percent. Only Maldives and Nepal are estimated to grow more slowly than Pakistan, according to a new World Bank report.

Estimated at $46 billion of investment until 2030, the CPEC initiative will finance a series of transport infrastructure projects ($11bn, mostly public investment) and energy projects ($33bn, mostly private). In the wake of prospective growth, several businessmen from Lahore and Karachi are also approaching banks to ‘explore the possibility’ of long-term financing for medium to large projects they plan to set up along the CPEC.

Most of the businessmen are interested in setting up projects for producing materials required in construction. It is natural because we do not have enough capacity to meet the demand for such materials once the implementation of the initiative catches pace over the next few months, experts said, adding: “we see the business confidence rising because of the anticipated opportunities that the CPEC initiative is expected to unlock for the investors.”

On the other hand, with local cement demand growing at a swift pace on the back of increase in private sector construction activities, cement industry sources believe the construction projects under China-Pakistan Economic Corridor (CPEC) are becoming a key catalyst for the growth of Pakistan’s cement industry.

In FY16, they expect Pakistan cement sales will grow by 3.5 percent annually to 36.7 million tons (82 percent capacity utilization). Local sales will clock-in at 31.5 million tons, up 11.4 percent while exports are expected to decline by 28 percent to 5.2 million tons.

According to the industry sources, cement industry appears to be at a sweet spot as 6MFY16 cement sales to exceed expectations and clock-in at 18 million tons, +5 percent YoY. Local dispatches to post robust growth of 14 percent YoY to 15 million tons in 6MFY16 thanks to brimming local demand horizon underpinned by rising construction activities.

Exports, however, in the same period will remain under pressure, down 26 percent YoY. Export performance remained lackluster due to pressure seen in Afghanistan and South African markets. However, sources suggest that export dispatches are likely to pick-up on the back of demand from Sri Lankan, Middle Eastern and East African markets.

Factors to fuel growth

Furthermore, Pakistan’s steel industry is far from attaining its market potential, some individual players have seen significant growth in the past three to five years. These include Agha Steel Pvt Ltd, which started production in 2013, produced 150,000 tons in 2015 (and aims to double this capacity to 300,000 tons in 2016, the year when the company goes public); Amreli Steels Ltd, which had a successful IPO in October 2015 when it produced 180,000 tons, aims to reach half a million tons in 2017.

International Steel Limited (a subsidiary of International Industries Limited and a public listed company) sold 463,000 tons and aims to increase this capacity to a million tons this year. This growth has been propelled by the demand generated by large infrastructure projects such as DHA City and DHA Oasis, Bahria Town and luxury projects by Emaar Pakistan and increasing demand in the automotive sector.

Another important factor set to fuel growth is the China Pakistan Economic Corridor (CPEC); this $46 billion mega infrastructure project is expected to increase demand exponentially.

A huge threat to Pakistan’s steel industry is Chinese imports. Pakistan has a Free Trade Agreement (FTA) with China and this means that finished goods are imported at concessional rates of duty. In 2015, China, which produced 823 million tons (about 50% of the total world steel production), exported a record 100 million tons, with Pakistan registering as one of their largest importers.

There is also some concern about the real impact of the CPEC on steel industry. Although this is slated to lead to unprecedented development in infrastructure (consequently an increase in demand for steel), question is as to whether the Chinese will use Pakistani made steel or import Chinese steel. This will set the direction of local steel industry. However, local cement industry is set to grow at a fast pace.