For all the hype that was created beginning last year for prospective demand in construction, the cement sector closed off the fiscal year with a mediocre increase of 4 percent in dispatches in FY17 year-on-year. This increase comes from an 8 percent growth in dispatches to domestic markets and a profound drop in cement exports (by 21% in FY17)— a trend that we have closely been following and cautioning against.
The figures reported by All Pakistan Cement Manufacturers’ Association (APCMA) show the sector bid the fiscal farewell with 40 million tons of cement— of which only 12 percent was exports. In FY16, this share was 15 percent, still much lower than earlier years when exports and local sales mix used to be 30:70.
A good chunk of cement sales used to constitute exports going to Afghanistan which was a key market for Pakistan; the latter a key supplier of cement to the economy that had very little capacity to manufacture cement itself. However, once sanctions from Iran lifted, the country which is one of the largest producers of cement with a capacity of 80 million tons started exporting to Afghanistan, Central Asia and Iraq at cheaper rates. As a result, Pakistani cement manufacturers lost their market share in Afghanistan, and nearly two years later are still finding it difficult to find their footing in that market.
Other markets it seems remain unexplored. South Africa was a key market but currently has an anti-dumping duty on Pakistani cement. India was proving to be a saving grace when we kicked off this fiscal year as cement exports to the country started to increase despite border skirmishes that have hurt trade relations between the two nations. However, these two slowed down in the months after.
India is the second largest cement manufacturer in the world. Pakistan was able to export after 2007 when India removed the countervailing and additional duties on imported cement to fill the demand-supply gap in the economy. There are also only select markets in the country that welcome Pakistani cement because of the price cut— around 10-15 percent less than Indian cement reaching those locations (e.g. Amritsar). Now the country is expanding so it may not even require imports to meet any gap. India can only be a limited market for Pakistani cement.
On the domestic front, the industry closed off FY17 with a capacity utilization of 87 percent and cement lobbies believe the demand they would see over the next five years is an upwards of an added 28 million tons to what numbers are currently. At 46 million tons of capacity, the sector is now fast in expansion mode with most players racing to add capacity to their plants in the hopes to capture this elusive construction demand.
The estimates seem ambitious but deals have already been signed; financing arranged, mining licenses obtained, plants commissioned. The industry by FY20 would have a combined capacity of nearly 74 million tons. But with the current shrinking share of exports from the sales equation, domestic demand will be carrying the entire growth on its shoulders and it is a tough position to be in. In FY17, domestic dispatches grew by less than 10 percent— even if in the future, they grow at the same pace, the subdued exports will continue to balance them out.
So while the capacity utilization has reached a high of 90 percent, this utilization would significantly fall over the coming years. Our prediction is that the cement cartel will break by fiscal 2020 and prices will come down as price competition is a certainty.
The companies that will be able to benefit the most as they embark on their combined journey to add capacities will be those who try to reach other exporting markets. Depending so heavily on domestic demand is not the best strategy and diversifying the sales and destination mix would be the best bet for any company hoping to remain ahead of the pack. Exports also tend to keep manufacturers on their toes, so they are able to maintain their competitiveness.
The sector is growing and expanding no doubt—but not without qualifiers.
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