Page 59 - CCL AR 2017 Final

Following are the major risks which may affect our business Mitigant: The Company enjoys the benefit of the strategic
operations and mitigating strategies for controlling these risks: location of its production plant near Nowshera, about 52
kilometers away from Peshawar (KPK), near the Pak Afghan
Rise in Energy Costs border. Due to its proximity to the border, the Company incurs
The energy cost component is a substantial part of the overall considerably lower distribution costs than our competitors.
cost of production in our Company i.e. above 50% on Reduction in distribution costs allows the Company with a
average. Hence any change/rise in coal prices or upward margin available to reduce its selling prices in order to make the
movement in electricity tariff would hurt margins of the Company further competitive to export cement to Afghanistan
Company as a whole. The coal prices have significantly at lower prices in order to compete with the low cost Iranian
increased in recent past. cement. Further, Cherat is a premium brand in Afghanistan
which helps us to get better margins.
Mitigant: The company is using a mix of South African and
Afghan coal to manage the risk of higher coal prices. In case Credit Risk
of further increase in coal prices, company has the option to Credit risk represents the risk that one party to a financial
use Refused Derived Fuel (RDF) and Tyre Derived Fuel (TDF). instrument will cause a financial loss for the other party by
With respect to power, the Company is already benefiting failing to discharge an obligation.
significantly from its ‘Waste Heat Recovery’ project and
almost one third of its electricity is generated free of cost. The Mitigant: The Company’s exposure to credit risk is minimal as
Company is also using its furnace oil based generators in view the Company receives advance against sales. In most of the
of lower fuel prices. Company is in process of getting a Gas cases where credit is given, proper security has been taken.
connection and has ordered tri-fuel generators to ensure not
only back up arrangements but also cost saving especially in Working Capital Management
peak hours. Risk of increase in the cost of borrowing may limit the
avenues for availability of sufficient working capital.
Announcement of New Capacities
In view of increased demand announcement of new Mitigant: Management has addressed the risk of shortage of
capacities of more than 25 million tons have been made. In working capital by availing the sufficient lines from the
case of a downward trend in demand, there can be mismatch diversified financial institutions in order to meet the short
of demand and supply. term finance requirements of the Company.
Mitigant: The Company has used adequate leverage in (Additional details of financial risk management and
expansion project and is working on efficiencies to manage objectives are provided in the notes to the financial
any unforeseen situation. statements).

Strong Reliance on Government Development Programs OPPORTUNITIES
The main growth engine for the sector is the allocation made The management of the Company always focuses to
towards Public Social Development Program (“PSDP”) funds capitalize on its experience and strategy to keep the direction
by the Government of Pakistan in its annual budget. The and pace of the Company in line with the Company’s stated
funds are primarily used towards the development of vision. It also concentrates to utilize existing and potential
infrastructure projects. opportunities confronted by the Company. Considering the
prevailing growth of cement industry, greater allocation of
Mitigant: The trend in previous years has been to allocate a PSDP and launch of China-Pakistan Economic Corridor, local
substantial amount towards PSDP at the time of budget demand of the cement is likely to increase in short-run as
announcement which is not consumed fully as the year well as in long-term. This has resulted in the decision of
progresses to absorb the growing government expenditures in expanding the capacity of the Company through installation
other areas. With increased infrastructure spending in the last and commissioning of line II during the year. Further,
three years, local cement production has also witnessed an Company has also initiated to install another line having
improvement while the Government has announced PKR production capacity of more than 7,100 t/day of cement at
2,113 billion towards PSDP for the year 2017-18. Out of this, the same location.
PKR 1,112 billion has been allocated to provinces and PKR
1,001 billion for the Federal Government. The current The Company is committed to use existing products and new
government is focusing on infrastructure development projects solutions in order to systematically enhance our growth and
and its positive impact has already started to reflect in the local strengthen our position in global markets. Investing in new
cement markets. Next year, being an election year, we expect projects and increasing the productivity of existing ones are
maximum utilization of PSDP fund. key elements for future organic growth. In the year under
review, the Company more than doubled its capacity by
Instability in Export Market installing another production line and now well placed to get
Due to political uncertainty and the availability of low cost maximum benefit from potential opportunity.
Iranian cement in Pakistan’s biggest export market
Afghanistan, the sustainability of Pakistani cement has
become more challenging due to which export sales of the
Company have declined.

57
Annual
Report 2017