Three major trends are setting the wheels in motion for the cement industry’s demand: a dip in government spending that was central to the economic agenda of the previous government and is the first to go during a fiscal crunch, exports ceremoniously rising to the occasion to make up for lost domestic appetite, and a more equilateral distribution of exports to different destinations. Evidently, exports are shifting away from Afghanistan, onto other countries via sea; and from cement to clinker which is where Pakistan is more competitive.
In the first half of the fiscal year, federal PSDP was 26 percent lower year on year, government spending 8 percent of its overall expenditure on PSDP against a nearly 10 percent average of the PML-N government during its five year tenure. Moreover, private sector construction—including housing and commercial development—has also not been entirely robust possibly due to the negative perception that currency depreciation and monetary tightening have left in their wake.
This has led to local demand coming down from 90 percent in FY18 to 84 percent in 7MFY19 as a share of total dispatches. Meanwhile, exports have grown from 10 percent of total to 15 percent in the latest seven months. In fact, it would appear that exports are moving toward the 2008-13 period where they used to be above 25 percent of all cement sales which was a time when the economy had slowed down. This share remained on the same level until after 2014 when the economy started to pull back up again. Cement sales are clearly following a known pattern, and explain the rise in exports.
What it doesn’t explain is the flip in the markets. As frequently discussed in this column, Pakistani cement in Afghanistan is no longer finding market access as much as it used to. Until 2006, Afghanistan was the only market Pakistan was exporting to. Then came other markets, but the share of Afghanistan in Pakistan’s total cement exports remained high. At their peak, they were 55 percent of all cement exports in 2012. This share started moving south as other African and Asian markets opened up. During 2017, they dropped substantially from 42 percent to 37 percent and now in 7MFY19, exports to Afghanistan constitute only 25 percent of all exports. Part of the reason is, Afghanistan has opened doors to other countries including Iran which has a huge overcapacity it is unable to absorb itself (about half is used domestically), and plans on raising the current 80 million tons to 120 million tons by 2025.
Since Iran came into the picture after international sanctions were lifted, Pakistan has sold 1.2 million tons less cement to the Afghan market. There is also the fact that political tensions between the countries have not always been conducive to vibrant trade relations, but as earlier opined: “it seems the issue with cement is economics. Other cement entering that market is simply cheaper and Afghanistan is finally diversifying its trade relations as well”; Iran poaching Pakistan’s share being only one of those developing partnerships.
The other interesting market is India which has never exactly granted game changing market access to Pakistani cement in the first place, and is itself a major cement manufacturer. Even so, Pakistan has been selling over 0.5 million tons of cement since 2008 which climbed to 1.2 million in 2017 and 2018. This cement was going mainly to markets like Amritsar or Mumbai where Pakistani cement is 10 percent cheaper. However, it is unlikely after the recent political pressures which ultimately impact economic relations that Pakistani cement will continue to find market in India. Even if cement can reach some markets through the border, the 200 percent duty on Pakistani goods will make them entirely unviable.
As exports move away from Afghanistan and toward other far flung countries, cement manufacturers located in the South are the most to gain as they are strategically located near the ports. This would bode well for their top-line especially since the depreciated rupee yield them better margins compared to a year ago. However, higher transportation and freight still make exports fetch $10 per ton less than domestic sales. Though cement industry is raising capacity to over 70 million tons, compared to other major cement makers in the world who have massive scale, Pakistani cement will always have to take a price cut. But during domestic freeze out, they provide a solid cushion, which is what matters.
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