Cement: Anything new?

There is finally something new in the cement numbers—a new low. As we inch closer to the end of this fiscal year, nearly a quarter of Pakistan’s cement exports (5.5 million tons) this period last year have been lost. This is close to 1.2 million tons of cement, 62 percent of which was going to Afghanistan. Pakistan has also lost a substantial share in other destinations, particularly South Africa.

At the expense of being repetitive, this is not good. To review: cement dispatches in both north and south have maintained a growth of 8-10 percent and 12-14 percent respectively in the latter half of the fiscal year. The sector is running at 97-99 percent capacity utilization per month because of the local demand and with that in mind, the sector is expanding by nearly 30 million tons over the next five years, with some expansions coming through as early as next year.

Intuitively, if local demand continues to grow at this rate, the incremental production will get absorbed in the beginning, but if exports continue to drop and local demand fluctuates, we will be left with oversupply. Assuming by the end of this fiscal year, cement dispatches grow by 10 percent year on year, and exports fall by a quarter, the average growth in the sector will be 5-6 percent. At this rate, by FY20, we will have nearly 25 million tons of excess supply. This is given most of the expansions come through over the next 3 years. If these expansions come through in the next five years, capacity utilization will be 75 percent.

These are just some quick calculations based on the current growth numbers- the truth may be quite far off. For one, it is really unclear how much growth will we eventually see in construction year after year- infrastructure or otherwise. One thing is for sure though; the industry cannot afford to lose on exports more than it already has. Exports used to be 35 percent of all dispatches in 2009. By 2015, Pakistan’s export share fell to 20 percent and further down to 15 percent in 2016. In 11MFY17, they stand at 11 percent.

Cement manufacturers believe that they are unable to get access to foreign markets because of the high cost of doing business here at home—with high energy costs, and coal duties. But this is difficult to see because the sector is highly energy and cost efficient working at 40-50 percent gross margins. True, their export margins are much lower as they have to keep prices competitive in foreign markets (as opposed to at home).

As a remedy, they are seeking duties on the import of clinker citing the fall in their exports as well as smuggling. Is that a strategy that would reap positive results? What should their strategy be instead, and why are exports important? We will discuss in this column next time.