“Concrete” plans

If the PML-N government’s infrastructure and development spending was giving impetus to the cement sector, the new government’s promise of building five million houses over the next five years and the building of the Basha-Diamer Dam could be an icing on a pretty well-layered cake. The sector wrapped up FY18 with a growth of 14 percent overall (local: 15%, FY17: 4%, FY16: 10%); now kicking off the first month of FY19 with a 5 percent growth with local demand rising by only 4 percent, according to numbers revealed by the All Pakistan Cement Manufacturers’ Association (APCMA).

The sector has had a rough past year and though its local demand flourished—average month on month dispatches grew by 16 percent against a projection of 12-15 percent—exports were falling because of decreased demand in key markets, input prices were rising due to global commodity price hikes and currency depreciation, and retention prices were falling as the sector entered a competitive phase with ample supply at the consumer’s disposal. Together this concoction of factors led to plummeting margins for cement manufacturers (by an average of 25-30% across companies).

But even as all these dynamics were coming into play, the industry was prepping for a massive expansion to 72 million tons, of which about 20 million tons is yet to be added as Lucky, DG Khan Cement, Bestway and Attock have already added capacity in the last few months. Companies were also investing into bringing efficiency into their plants especially in relation to energy as they installed waste heat recovery units and coal fired power plants to alleviate the pressure on the grid and also save on cost of production.

The sector yielded 93 percent capacity utilization in FY18. As demand kept up with the added capacity, retention prices also improved. On average, cement spot prices rose by 12 percent between February and July with as much as Rs100 per bag price hike in some areas in the north.

Prices may not pose the sector as much of a problem going forward if demand persists. However, whether demand will persist is the big question here. With PM Imran Khan holding the reins of the country and austerity drive in full force; will he be as extravagant as his predecessors on planned infrastructure projects? There is very little clarity on what happens to projects in the pipeline and those that have to be initiated.

Moreover, as government tightens its purse strings, and as interest rates go up, the economy will see an overall slowdown which may affect the streak of real estate commercial development. Expected cement growth of 10-12 percent may be a little far-fetched, especially since exports that had started to recover tumbled down in Afghanistan and India. The companies may have started marketing to other countries as sea-route exports in July-18 nearly doubled from numbers in July-17 as well as last month. This may be a result of growing demand in certain African markets, as well as cement manufacturers taking price cuts overseas in their quest to maximize capacity utilization and diversify their sales mix.

If local demand simmers down, exports will have to play a role, otherwise all the pre-planning of the sector will go down the drain. Hopes that the Afghan market may bounce back should also be considered with a healthy dose of skepticism. Since FY15, Iran’s cheap cement had taken over a good chunk of Pakistani market share- if Pakistan catered to 80-90 percent of the country’s demand before, now it caters to less than 60 percent. Afghanistan is also set to produce its own cement (estimated 30% of Afghan cement imports) that would further chip away at Pakistan’s market share. On the other hand, quality of Pakistani cement is considered to be superior. Though, the Afghan market does seem sensitive to price changes which make a strong case for export diversification. July’s numbers suggest it already may be happening.

Analysts have argued that Indian market might become a prime location for Pakistani cement as the country’s limestone reserves are dwindling. Meanwhile, markets closer to the Wagah-Attari border have bought Pakistani cement to avoid inter-state taxes and proximity in the past. Pakistani cement is also 15 percent cheaper than some of the local cement reaching these markets.

There is a lot of uncertainty on demand especially since the new government’s plans are not clear. Optimistically, if the government indeed adds a million houses each year, and is able to start dam construction, any demand lost on infrastructure spending may be easily replaced and surpassed by these massive undertakings. It could all go the other way around as well.