High raw material cost pushes local cement price up
FE Report | Tuesday, 15 July 2008
Cement does so much for us that it's difficult to imagine a world without it. Cement is a key element of modern construction, from our homes, through to schools, hospitals, offices, roads, railways and airports and what not?. Construction and cement move in parallel. It quite literally provides the foundation for many of the aspects of our daily lives that we take for granted. Cement is the glue that bonds together the coarse and fine aggregates which then become concrete. Concrete is the second most consumed substance in the world after water. As a constituent of concrete, cement puts much of the strength into our homes, schools, hospitals and much more.
Now let's look at how cement in Bangladesh has been able to put its strength into our construction sector for last 3-4 years. The construction industry has been facing higher price of construction materials including cement for last 3-4 years. There has been lot of discussions these days over price hike of cement throughout the country. Here is an indepth analysis to detect the real situation behind the price increase.
Bangladesh is an import dependent country for basic raw material of cement i.e. clinker. The large portion of clinker of about 5-6 million tons are carried by ocean going vessels from countries like Thailand, Indonesia, Malaysia, Philippines etc. every year. The following are some of the reasons for the price increase of cement world over in general and in Bangladesh in particular.
a) Over the past few years say until early 2007, world economy had been growing steadily. Increasing urbanization, major housing shortages and need to expand infrastructure are leading to steady demand for all kinds of construction materials including cement. In particular, when talking about China and India, it is a fact that these two largest economies have been growing rather quickly. Both have been dominating to become business and industrial news headlines for last 5-6 years.
b) China's GDP achieved another double digit increase (111.4%) last year, the fastest in 13 years. Manufacturing sector, trade and infrastructure are the key drivers in this strong economy. The Beijing Olympics, the National Housing Reform Pro~rarn and the forthcoming EXPO 2010 in Shanghai etc. are contributing to the construction boom. China will be spending at least USD 400 billion from now until 2010 on airports, roads, water systems and public works projects and hence China has/will become the biggest consumer of cement. Its appetite for cement was continuously growing and at one stage it had compelled to stop exporting cement and clinker to various countries including Bangladesh, which had eventually led to increase in clinker prices worldwide. However, in recent past it has restarted exporting clinker again in a very selective manner.
c) Similarly, another big giant Inclian-economy is presently growing at 9-10 % every year, having previously been 3-~%. The increase over the last 15 years has given the country a great deal of internal strength. Moreover, Foreign Direct Investment (FDI) in the industrial sector has risen rapidly. With the economic growth, constrOction industry in general and cement industry in particular has grown manifold in India for last several years. India, once known as one of the largest exporters of cement and clinker has now stopped selling cement and clinker outside the country and is meeting the growing home demand. It is estimated that in near future capacity of -cement industry in India will reach 298 million a year.
d) The oil price is record high which'is making the shipping industry ask for more freight. On the other hand cargo movement to China has abnormally gone up. As clinker being the relatively cheaper cargo, usually old vessels are used to carry clinker worldwide saving marine insurance. Apart from cement and clinker, China has emerged as the largest consumer of iron ore and coal too. The owners of old vessels found better opportunity to scrap old vessels rather than plying for transportation of clinker and this has resulted scarcity of old vessels in the shipping market, A common size vessel (capacity 35 000 IVIT) for carrying clinker used to cost charter hire of about US25000 per day about one year back and today same size vessel costs charter hire of about USID 35-40000 per day. The shipping market has touched all time highs that have never been seen before. Covering all these additional cost, clinker is now being imported at USID 70-72 per ton as against it was at 60-62 per ton in 2007. Cement industry in Bangladesh is unable to pas on this extra expense of 20-25% to the market.
e) Price of other raw materials like gypsum, fly-ash and slag has not only gone up but sourcing of these materials has also become difficult now a days because of extra demand of these items at where they are produced. Gypsum is now selling at USID 42-43 per ton as against at USID 32- 35 in 2007. Besides, fly-ash and slag are being sold at USID 18-20 and USID 32-35 respectively causing extra expenses on 25-30% than the expenses of previous year.
f) In last 10 years, construction industry has witnessed cle-growth in 2007 for the first time in Bangladesh causing unfavorable situation for the cement industry to match the higher clinker cost with volume growth. Squeezed by surplus production against falling consumption and inability to pass on of such additional cost to the consumers, the country cement industry is now in critical state.
g) The poor power situation has made this industry more threatening. The power generation scenario with the onset of this summer season is going,from bad to worse. It has been learnt from the PIDB sources that the country's" average power generation capacity has come down to 3700 megawatts as against the demand of 4350 megawatts. This bleak situation is hampering productivity of all industry in the country and cement industry is not exception to that. Unfortunately cement industry hardly can recover this extra cost from the market.
h) Local transportation cost has risen several times in during last two three years that has lead to extra burden to the company. The main reasons of extra transportations costs are exorbitant fuel price, loading restriction to cross over Jamuna Bridge, addition lead-time to facilitate priority movement of food grain etc.
Considering all above facts, an inescapable reality is that cement industry of the country is bearing extra cost of 30-35% in a time a span of one year, while industry was able to enhance price maximum by 3-5% during this one year.
It is expected that international prices of clinker a-re not going to come down soon. Some believe that these prices might remain for a longer period of time until the slowing down construction in China and India takes place and reconstruction of Iraq is finished. There are also very little chances that cost of other element will go down shortly.
Under these circumstances, there is no option open but to adjust with the higher price and bear these extra costs. The country has to accept the reality. The cement industry already affected with over capacity is battling hard to survive.
The notion that some cement manufacturers are manipulating the market was found to be incorrect. However, only Government may come forward to heal this situation by reducing the import duty of clinker and waiving the VAT reasonably to help encourage the development work of the country in an economical way.
Now let's look at how cement in Bangladesh has been able to put its strength into our construction sector for last 3-4 years. The construction industry has been facing higher price of construction materials including cement for last 3-4 years. There has been lot of discussions these days over price hike of cement throughout the country. Here is an indepth analysis to detect the real situation behind the price increase.
Bangladesh is an import dependent country for basic raw material of cement i.e. clinker. The large portion of clinker of about 5-6 million tons are carried by ocean going vessels from countries like Thailand, Indonesia, Malaysia, Philippines etc. every year. The following are some of the reasons for the price increase of cement world over in general and in Bangladesh in particular.
a) Over the past few years say until early 2007, world economy had been growing steadily. Increasing urbanization, major housing shortages and need to expand infrastructure are leading to steady demand for all kinds of construction materials including cement. In particular, when talking about China and India, it is a fact that these two largest economies have been growing rather quickly. Both have been dominating to become business and industrial news headlines for last 5-6 years.
b) China's GDP achieved another double digit increase (111.4%) last year, the fastest in 13 years. Manufacturing sector, trade and infrastructure are the key drivers in this strong economy. The Beijing Olympics, the National Housing Reform Pro~rarn and the forthcoming EXPO 2010 in Shanghai etc. are contributing to the construction boom. China will be spending at least USD 400 billion from now until 2010 on airports, roads, water systems and public works projects and hence China has/will become the biggest consumer of cement. Its appetite for cement was continuously growing and at one stage it had compelled to stop exporting cement and clinker to various countries including Bangladesh, which had eventually led to increase in clinker prices worldwide. However, in recent past it has restarted exporting clinker again in a very selective manner.
c) Similarly, another big giant Inclian-economy is presently growing at 9-10 % every year, having previously been 3-~%. The increase over the last 15 years has given the country a great deal of internal strength. Moreover, Foreign Direct Investment (FDI) in the industrial sector has risen rapidly. With the economic growth, constrOction industry in general and cement industry in particular has grown manifold in India for last several years. India, once known as one of the largest exporters of cement and clinker has now stopped selling cement and clinker outside the country and is meeting the growing home demand. It is estimated that in near future capacity of -cement industry in India will reach 298 million a year.
d) The oil price is record high which'is making the shipping industry ask for more freight. On the other hand cargo movement to China has abnormally gone up. As clinker being the relatively cheaper cargo, usually old vessels are used to carry clinker worldwide saving marine insurance. Apart from cement and clinker, China has emerged as the largest consumer of iron ore and coal too. The owners of old vessels found better opportunity to scrap old vessels rather than plying for transportation of clinker and this has resulted scarcity of old vessels in the shipping market, A common size vessel (capacity 35 000 IVIT) for carrying clinker used to cost charter hire of about US25000 per day about one year back and today same size vessel costs charter hire of about USID 35-40000 per day. The shipping market has touched all time highs that have never been seen before. Covering all these additional cost, clinker is now being imported at USID 70-72 per ton as against it was at 60-62 per ton in 2007. Cement industry in Bangladesh is unable to pas on this extra expense of 20-25% to the market.
e) Price of other raw materials like gypsum, fly-ash and slag has not only gone up but sourcing of these materials has also become difficult now a days because of extra demand of these items at where they are produced. Gypsum is now selling at USID 42-43 per ton as against at USID 32- 35 in 2007. Besides, fly-ash and slag are being sold at USID 18-20 and USID 32-35 respectively causing extra expenses on 25-30% than the expenses of previous year.
f) In last 10 years, construction industry has witnessed cle-growth in 2007 for the first time in Bangladesh causing unfavorable situation for the cement industry to match the higher clinker cost with volume growth. Squeezed by surplus production against falling consumption and inability to pass on of such additional cost to the consumers, the country cement industry is now in critical state.
g) The poor power situation has made this industry more threatening. The power generation scenario with the onset of this summer season is going,from bad to worse. It has been learnt from the PIDB sources that the country's" average power generation capacity has come down to 3700 megawatts as against the demand of 4350 megawatts. This bleak situation is hampering productivity of all industry in the country and cement industry is not exception to that. Unfortunately cement industry hardly can recover this extra cost from the market.
h) Local transportation cost has risen several times in during last two three years that has lead to extra burden to the company. The main reasons of extra transportations costs are exorbitant fuel price, loading restriction to cross over Jamuna Bridge, addition lead-time to facilitate priority movement of food grain etc.
Considering all above facts, an inescapable reality is that cement industry of the country is bearing extra cost of 30-35% in a time a span of one year, while industry was able to enhance price maximum by 3-5% during this one year.
It is expected that international prices of clinker a-re not going to come down soon. Some believe that these prices might remain for a longer period of time until the slowing down construction in China and India takes place and reconstruction of Iraq is finished. There are also very little chances that cost of other element will go down shortly.
Under these circumstances, there is no option open but to adjust with the higher price and bear these extra costs. The country has to accept the reality. The cement industry already affected with over capacity is battling hard to survive.
The notion that some cement manufacturers are manipulating the market was found to be incorrect. However, only Government may come forward to heal this situation by reducing the import duty of clinker and waiving the VAT reasonably to help encourage the development work of the country in an economical way.