KPK cement producers to face cost increase as royalty shift proposal gains ground

The Khyber Pakhtunkhwa (KPK) government has proposed a significant change in the royalty structure for cement manufacturers, shifting from a raw material-based calculation to a bag-based system, which would mirror the existing royalty rates in Punjab, according to a report by Topline Securities.  

The KPK Mines & Minerals Department has scheduled a meeting with local cement manufacturers on March 24, 2025, to discuss the proposed shift from raw material royalty to bag-based royalty.

If implemented, the royalty will be calculated at 6% of the ex-factory sale value, a move that could significantly increase the cost for KPK cement manufacturers.

Under the current system, the royalty on limestone and argillaceous clay used in cement production for KPK-based plants is fixed at Rs250 per ton. The proposed change would see this figure rise by Rs1,100 to Rs1,200 per ton, based on current ex-factory prices, in line with the royalty structure applied in Punjab.

Punjab had implemented a similar increase in royalty rates, moving to 6% of ex-factory prices for cement from July 1, 2024. However, Punjab-based manufacturers were able to obtain a court stay on the implementation, subject to bank guarantees. 

Despite this, KPK-based manufacturers are likely to account for the increased royalty costs in their financial statements, treating the increase as a non-cash expense until the legal matter is resolved.

The proposed change comes at a time when manufacturers in KPK have enjoyed lower raw material costs compared to their counterparts in Punjab. Currently, Punjab-based manufacturers face approximately Rs1,500 higher raw material costs per ton compared to KPK-based manufacturers. This pricing disparity had given KPK manufacturers a competitive edge, especially for those selling in Punjab.

In an earlier note published on August 16, 2024, Topline Securities had mentioned that the pricing gap between KPK and Punjab-based manufacturers might not last long. The brokerage firm noted that any moves by provincial governments to adjust royalty rates could lead to a more balanced cost structure.

If the proposal goes ahead, the KPK-based cement manufacturers likely to be affected include Lucky Cement (North Plant), Kohat Cement, Bestway Cement, Cherat Cement, Fauji Cement, and Dewan Cement.