The Bestway Cement Limiteds Finance Essay

Bestway Cement Limited is part of the Bestway Group of the United Kingdom. Bestway Group was founded by Sir Mohammed Anwar Pervez nearly thirty three years ago on what could be best described as one man's vision and passion. Since then it has translated into a unique and successful group of businesses spread across the globe with the help of committed, professional and hardworking management and staff, together with loyal customers and suppliers. The Group has a well diversified portfolio incorporating within its folds cement manufacturing, global banking, wholesale cash & carry business, a string of retail outlets, real estate investment, ethnic food and beverage import and distribution and milling of rice. Recently the group has embarked upon a large power generation project in Pakistan thus further diversifying its operations and revenue base. The Cement sector of Pakistan which was more or less showing an increasing trend from last few decades is unfortunately posing a decline from last few years. Many things, variables and aspects have contributed to the negative trend of its growth. A holistic view of cement sector in totality could have given many different pictures but given are localized view to the economic growth of the sector; we found out that it has suffered a lot. The economic situation also exacerbated, collectively resulting in decline of production and exports. The analysis of this sector from various perspectives through the research and consultation of available research verified and to some extent endorsed the causes which were sorted out and listed down in the literature review. These causes are high cost of energy, heavy taxation, high freight charge, low spending upon PSDP, fluctuating interest rates, declining international market share political instability, law and order situation, economic constraints to retrieve back to original situation and international market competitiveness. Looking into all major causes, recommendations are given in way forward which is to the best of our understanding and capacity for the Bestway Cement Limited.

Introduction

Bestway Cement Limited is a part of Bestway Group which is a London based corporation. Its foundation was laid by Sir Mohammed Anwer Pervez almost thirty years ago. The group has a well-diversified portfolio and comprises cement manufacturing, global banking, wholesale cash and carry business, a chain of retail outlets, real estate investment, ethnic food and beverage import and distribution and milling of rice. Bestway group has fortunately managed to invest in unique and successful group of businesses spread across the globe with the help of committed, professional and hardworking management and staff, together with loyal customers and suppliers. Even in a period of economic slowdown and energy crisis in the last five years, which adversely affected the profitability of the industry, Bestway was able to record pretax profits even at 60% capacity utilization. The company has been amongst the leaders in the recent market boom, operating above 100% of is installed capacity. (Bestway Group Company, 2011) Bestway is U.K's second largest cash and carry operator in terms of turnover with group annual turnover in excess of US Dollars 3.6 billion and profits in excess of US Dollars 135 million; the second largest cement producer in Pakistan and joint owner of Pakistan's third largest bank, United Bank Limited. Its rice milling facilities are one of the largest of its kind in the country. The group is the largest overseas Pakistani investor with investments in excess of US Dollars 1 billion and a global workforce of over 22,000 people spread over four continents. (Bestway Cement, 2011)

What is Cement?

"Cement is a material with adhesive and cohesive properties that makes it capable of bonding mineral fragment into a compact and rigid mass. The word cement seems to have been derived from the middle age English "cyment", and Latin caementum". (APCMA, 2011) The latter word "caementum" meant rough quarried stone or chips of marble from which a kind of mortar was made more than 2000 years ago in Italy. Common lime, hydraulic lime, gypsum plaster, "pozzolana", natural and Portland cement are few of the material, which are used for cementing purposes. These materials may be classified into two groups:

Non-Hydraulic

Non-hydraulic cement does not have the ability to set and harden under water but requires carbon dioxide from air to harden e.g. non-hydraulic lime and plaster of Paris. Their cementing prosperity arises from the re absorption of gases that were expelled during their processing. Their products of hydration are not resistant to water. (APCMA, 2011)

Hydraulic

Hydraulic cement is defined as cement having the ability to set and develop strength in air or under water and which are insoluble in water after they have set. Such cement harden even in the absence of air and form a solid product which is stable in water and can be safely used in all structures in contact with water. Hydraulic cement includes hydraulic limes, Portland cement (both basic and blended), oil-well cement, white cement, colored cement, high alumna cement, expensive cement regulated and hydrophobic cement etc. (APCMA, 2011)

Branches of Bestway Cement

Bestway Cement Hattar

Hattar is an area in Haripur in the North West Frontier province where the company established its sister branch in 1994. This was an initial investment of US$ 120 million.

Bestway Cement Chakwal-I

Another strategic decision made by the company was in 2004 to establish a set up of 1.8 million tonnes per annum cement plant near village Tatral of district Chakwal, Punjab province, Pakistan. This is the company's second greenfield development project at a cost of US$ 140 million.

Mustehkam Cement

To further extend its presence in the cement industry, Bestway decided to bid for 85.9% of equity of Mushtehkam Cement limited a 0.6 million tons per annum capacity plant, following an offering by the Privatization Commission, Government of Pakistan.

Bestway Cement Chakwal-I

In May 2006, the group declared plans for setting up of a second 1.8 million tons per annum capacity plant near their Chakwal operations at a cost of US$ 180 million. This was Bestway's third green field cement plant in Pakistan.

Vision Statement

"To Produce High Quality Cement At The Lowest Cost." (Bestway Group Company, 2011) Vision statement is an aspirational description of what the company wants to achieve in the long term. The purpose of a vision statement is to serve as a guide for the present and future course of action. It would not be wrong to call a vision statement the framework of a company's strategic planning. The vision statement is applicable to an entire organization. The vision statement of Bestway clearly identifies its long term goals. The company wishes to sustain its position of a market leader in the future. It wants to pave way for itself so that it can stand at the top of the pyramid and enjoy the privileges of a market leader. The company wishes to do so by not ignoring the standard and quality of cement. The statement does not seem to leave an impact on the readers. It lacks depth. The vision statement should give a photographic vision of where the top management wishes to see itself in the long term. This particular vision statement does not do that. It should be able to tell the readers why the company wishes to exist tomorrow. It should have highlighted a few broader goals. Overall, it is a very weak vision statement. It needs to be seriously reviewed by the company. This statement does not give a very positive picture of the company and does not tell where the company wishes to see itself in the future.

Company Mission

A· Bestway will consistently produce High Quality Cement. A· Bestway will endeavor to be the lowest cost producer. A· It is company's aim to achieve 20% of the market share of North Zone in the short term and ultimately 30% in the longer term.A A· Bestway will continue to provide a high standard of customer service. A· In order to meet future expansion needs, Bestway will continue its policies of staff training and development, promoting from within whenever possible. A· Bestway appreciates it has responsibility towards the community within which it operates.A  It will continue to set aside 2.5% of the net profit for education and charitable purposes (Bestway Cement, 2011) A mission statement defines what an organization is, why it exists, its reason for being. At a minimum, your mission statement should define who your primary customers are, identify the products and services you produce, and describe the geographical location in which you operate. (Entrepreneur Media, 2012) The mission statement highlights the company's short term goals. These are the goals that revolve around company's customers, suppliers, and stakeholders.

It is more important to communicate the mission statement to the employees than to customers. The employees have to understand the mission statement and then set a path that would make them achieve the goals that have been established. According to the mission statement of Bestway Limited it can be understood that Bestway promises to produce high quality cement on a consistent basis. It will not compromise on quality whatsoever. It is one of the top priority of the company to main high quality standards. Moreover, the company promises to do so by adopting methods which would help the company in keeping their production costs low. This is beneficial for the customers as they are going to get a fine quality finished product at a reasonable price. They want to be cost efficient as compared to their competitors. This would also, benefit the shareholders. Low costs would result in higher margins in terms of profitability. Furthermore, Bestway aims to provide commendable customer service. They do not want to compromise when it comes to customer services. They want to have efficient workforce which would cater to the problems of the customers.

International Markets

Bestway has tapped many international markets which include Central Asia, Sri Lanka, Africa, and Middle Eastern Countries. "Bestway has remained the single largest exporter of cement to Afghanistan for past many years; hence it has and continues to play an important role in the rebuilding and development of that country." (Bestway Cement, 2011)A Bestway cement has become the first Pakistani company to export cement to India on trucks. The company started this venture in April, 2012. Since 2007, Bestway has been regularly exporting cement to India both via land and sea routes. Within a very short span Bestway has become one of the largest exporters of Cement to India also. The Company views India as an important market and is keen to explore all possibilities of increasing the presence of its product there. The company has established its name in countries like Afghanistan and India, now it looks forward to tapping other international markets where it would be feasible to offer company's products. This step is taken in order to expand its operations. On the export frontage, Bestway has acquired certification from South African Bureau of Standardisation enabling it to seek export opportunities to South Africa. (Business Recorder, 2012)

Environment, a top Priority

Bestway's plants are environmentally friendly with emission standards that far exceed prevailing acceptable standards, both local and international. (Bestway Cement, 2011) The plants' emission levels are 50 microns whereas the Government of Pakistan's acceptable standards are 300 microns and international standards are 100 microns per cubic meter of air at NTP (Bestway Cement, 2011)

Quality Assurance

Bestway Cement is driven by high standards of efficiency and quality. Strict quality control procedures are applied to ensure that these aims are achieved. The best quality control equipment in Pakistan is in use at its plants. Apart from the usual equipment, Bestway's laboratories are equipped with state-of-the-art X-ray Fluorescent Analyzer and Diffracto meter technology. (Bestway Cement, 2011) Bestway Group was a pioneer in introducing this technology in Pakistan for the first time. By virtue of this equipment, the Company has been able to consistently produce better quality cement than is currently available in the country. Since inception, Bestway has been producing Portland cement of specifications far superior to the Pakistani, Indian, British and American standards.

Manufacturing Process

A binding material used in construction and engineering, typically made by heating a mixture of limestone and clay until it almost fuses and then grinding it to a fine powder. When mixed with water, the silicates and aluminates in the cement undergo a chemical reaction; the resulting hardened mass is then impervious to water. It may also be mixed with water and aggregates (crushed stones, sand and gravel) to form concrete4. The manufacturing of cement starts with the mining of the raw materials. The larger sized materials received at the plant are crushed; mix in a proportion and ground to secure a uniform blend for proper reaction. An intimate mixture usually of limestone and clay or other suitable materials is subjected from powdered form to solid in a kiln at a temperature of 1400-1500oC for a certain time. This product called clinker after cooling is ground with 4-6% of gypsum or other forms of calcium sulphate. The cement is then stored in a tower called silos for shipment in bags or in bulk. Source: (Dgtrdt.gov.pk, 2012)

Raw Materials

The main raw materials required for cement manufacturing are:

1. Lime stone
2. Clay (Shale)
3. Silica sand
4. Iron ore
5.  Gypsum

Requirements of Raw material

About 1500-1600 kg of raw materials is required to produce one ton of Portland cement. The average amount of materials required to produce one ton of Portland cement are 1.2-1.3 tons of chalky material like limestone and marl and 0.3-0.4 ton of clay material like shale etc. Besides, 0.05-0.06 tons of natural or synthetic gypsum is required to manufacture one ton of Portland cement.

Industry Overview

Pakistan's cement industry has shown tremendous progress since Independence. In 1947, there were only four operational cement units in West Pakistan. Demand during the same period was estimated at over a million tons. The industry observed a gradual growth in its production over the Ayub Khan's regime due to the establishment of five more plants with the capacity of 2.8 million tons with four more set up in 1960's. In these years the construction industry went through a boom as demand grew because of an expanding economy. Currently many cement plants are operating in private sector. Pakistan Cement Industry has huge potential for export of cement to neighboring countries like India, U.A.E, Afghanistan, Iraq & Russian States. The Financial Year 2010-2011 was not fruit full for the cement industry of Pakistan. Sluggish demand in the local market, increased competition in the international markets and a fall in profit margins marked the highlights of the financial year. (Khan, 2011) In addition to this, broken promises from the government, disruption of distribution channels due to floods and increase in raw material (coal) costs further added to the misery of the cement manufacturers. The demand for cement neither increased nor decreased and remained stagnant in the local market due to inadequate public spending and negligible private sector spending because of recession that prevails in our economy. "The government cut down on its Public Sector Development Program (PSDP) by 77 per cent during the financial year". (Khan, 2011)This happened primarily because the funds allocated by the government were not utilized properly.

However there is still a ray of hope left. The budget allocated by the government of Pakistan for the fiscal year 2012 looks handsome. PSDP has been allocated Rs710 Billion for the year. "The private sector demand was weak throughout the year. This was due to low per capital income and little investor confidence in the economy." (Khan, 2011)The private sector took on very little or no construction activity which automatically forced the players in the industry into severe price competition. This lead the companies to sell cement bag for as low as Rs235. Later on the manufactures controlled the worsening situation and prices were increased to Rs380 per bag mark. The industry also had to face a tough year in terms of international market as well. The industry exports to different countries like Afghanistan, Sri Lanka, India, China, and Africa. In the year 2011, the industry faced competition from Middle East. "The cement exports fell by 11.55 per cent from 10,657,235 M Tonnes to 9,426,112 M Tonnes." (Khan, 2011) "Government did not play its part in reviving the cement industry. If 80 per cent of one of your favorite export industries has suffered huge losses, then it is obvious that they are in trouble." (Khan, 2011) The government should have supported one its major exporting industry. The Pakistani Government had promised to pay the cement companies an inland freight subsidy. This promise was not put into materialization. Furthermore, the companies had to sell their products in the Pakistani markets at cheaper rates because the cost of transporting the product to Karachi Port was very high. However Government did support the industry by allowing a reduction in the Federal excise Duty and General Sales Tax. There were some companies who reported profits in the year 2011. These were those companies who were located very close to the harbor and did not have to incur the high costs of transportation.

There were natural disasters as well in the year 2011 that hurt the cement industry. "During the year, nature also seemed to be harsh on the cement industry. There were massive floods which disrupted all the distribution channels and pegged the economy back." (Khan, 2011) Currently, the cement industry does look in bad shape but there is some reason to be optimistic. The extreme damage caused by floods has to be reconstructed. This is bound to increase the local demand of cement. Urbanization is also a growing trend in Pakistan and this brings along it the demand for increased construction. The development in Afghanistan is on a rise as well especially after a growing GDP. (Khan, 2011) The cement market should look to capitalize on that. According to the Global cement report 2009, China maintained first position with 26 million tons in exports, while Japan got second position by exporting 12.6 million tons of cement. Third largest cement exporter in world was Thailand with around 12 million tons, followed by Turkey which exported 11.6 million tons of cement. Pakistan was at 5th position and had left Germany behind by exporting 11 million tons of cement during last fiscal year. Germany stood at 6th position with 9 million tons exports. Cement market experts told that Pakistan secured 5th position because of high demand of cement in nearby countries and by capturing new markets such as African countries, Qatar & Iraq. Pakistan could achieve the mark of 13 to 14 million tons exports by the end of the fiscal year keeping in view Indian market which has once again started importing cement from Pakistan.

The export of cement from Pakistan to India showed a sharp decline after Mumbai attacks. According to the All Pakistan Cement Manufacturers Association (APCMA), local dispatches were 19.3 million tons (down 14 percent YoY). However exports showed an encouraging increase of 47 percent (YoY to 11.3 million tons) during the last fiscal year. (Cement Pakistan Company, 2009) It was expected that the local demand of cement in Pakistan would have remained on high side due to the reconstruction activities of devastated homes, shops and schools in Swat and Malakand after Military operation. Overall Pakistan cement industry dispatches were likely to grow 7 percent in July 2009. The growth in cement dispatches was solely attributable to rising export volumes as domestic demand remained depressed on every comparable time period. Overall cement plants of Pakistan operated at 80 percent capacity utilization as compared with 81 percent utilization in the same month of last year. Cement exports of Pakistan continue to show healthy and positive growth trend and recorded 45 percent growth on Y-o-Y basis. However, on M-o-M basis, cement exports represented a decline of 3 percent. (Cement Pakistan Company, 2009) The year under review had been one of the worst in the history of local cement industry in terms of prices and profitability. The ongoing recession coupled with capacity expansions in the Pakistani cement sector have created the supply glut in the country resulting in free fall in prices due to a severe price war. The fierce price war has drastically eroded retention prices on one hand, while on the other hand input prices have also increased in general, particularly electricity charges that have increased by 24%. On the backdrop of declining prices, overall cement volumetric growth registered an increase of 9.3% to stand at 34.2 million tons.

 

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