Rising demand and healthy margins encouraged cement manufacturers to invest some Rs 254 billion for expansion of their production capacities aggressively from 49.4 million tons to 72.8 million tons in the next few years.
Sustained expansion in economic activity and investment in various infrastructure projects under Public Sector Development Programme (PSDP) and CPEC, coupled with increased demand from private housing schemes have bolstered construction sector during last few years, resulting in a spillover impact on the allied segments of cement and steel as well.
The State Bank of Pakistan (SBP) has included a special session on "cement sector" in its third quarterly report and believes that currently the cement industry is undergoing a major transformation, as a number of players are planning capacity expansions.
At present, there are 24 manufacturing units operating in the country with a total installed annual capacity of 49.4 million tons. More than 3 million tons capacity has already been added during FY18, while almost half of the players in the industry have so far announced capacity expansion.
In cumulative terms, the cement sector production capacity will be witnessed a staggering increase of about 50 percent in next few years and would add 23.4 million tons towards the production facility to reach around 72.8 million tons.
The expected expansion may be even higher if other firms with 8.1 million tons in pipeline also join this campaign. The SBP has collected information from firms and PSX notices and estimated that additional capacity would result in the imports of machinery of around $ 1.5 billion (about Rs 178 billion) over next few years. In the cement industry, cost of machinery imports comes around 70 percent of total cost of the unit/project. This means, the overall estimated cost of expansion would be around Rs 254 billion, SBP reported.
The report pointed out that healthy profit margin is another important factor that helps the industry to undergo capacity expansion. Specifically, the gross profit to sales ratio has averaged around 33 percent for the last five years - more than double the manufacturing sector's overall average.
The industry benefited from a slump in global market for raw material like POL and coal and historic low domestic interest rates. The margins for the industry strengthened when, instead of passing on the benefit to consumers, firms increased the local retail prices, it added. Further gains to industry were achieved due to the economies of scale, improvement in cost efficiency, and a decline in the debt-to-equity ratio.
This has led to a number of firms diversifying their operations towards other sectors of the economy as well. Despite healthy cash position, industry's borrowing needs will increase and cement Sector has availed Rs 34 billion for fixed investment purposes during July 2016 till March 2018.
The prevailing low interest rates would encourage firms to borrow more from the banking system and the commercial banks would also be willing to take exposure on the industry due to a decline in infected loan ratio, and healthy balance sheets of cement manufacturing firms, the SBP said. On the export front, the SBP pointed out that with influx of cheap Iranian cement in Afghanistan and imposition of anti-dumping duties on Pakistani cements in South Africa (the two main export destinations), exports may remain a challenge.
For a sound market share in export market, the cement manufacturers will have to compete with Iranian and Chinese cement manufacturers through improvement in cost efficiencies, it suggested.
With current expansion plans, the industry might be able to exploit economies of scale and gain competitive advantage. While there is a need to explore new markets to utilize their excess capacities post expansion, efforts in this regard could also increase export earnings in coming years.
In the current scenario, the absorption of announced capacities would require the industry to maintain its last five years' compound annual growth rate in cement sales over the next 3-4 years. Moreover, domestic sales of cement indeed recorded a strong average growth of 12.6 percent during FY17. This trend also continued in FY18, where Jul-Apr growth stands at 17.5 percent on the back of strong domestic demand, the report concluded.
Comments
Comments are closed.