Cement: Great expectations

May's numbers for cement are out, and they show stellar performance. The sector has registered its highest ever dispatches, recording at 3.6 million tons for May 2016; a 19 percent growth from FY15. Cumulatively, dispatches have reached 35.5 million tons in 11MFY16 against 32 million tons in the same period last year; a surge of 10.6 percent. The sector will likely end the year with historic highs in sales - and continue to grow in FY17 and FY18.

Local dispatches in both the northern and southern blocks have remained solid with a 16.6 percent and 23.7 percent year-on-year growth respectively, in 11MFY16. The northern block has outpaced its own performance, selling 2.5 million tons in May of this year going up from 2 million tons and 1.9 million tons in May of FY15 and FY14.

Exports have rallied against a negative backdrop with a slowdown in cement demand in key markets growing by seven percent between April and May 2016. This slight month-on-month growth is associated to an incremental turnaround in exports to Afghanistan and other countries through sea-routes, but overall, exports have witnessed a cumulative decline of 17.4 percent in year-on-year growth.

India is becoming a tough market given that it's building up local capacities. Exports to India might be restricted in the future with safeguard measures to protect local interests. Meanwhile, the antidumping duty imposed by South Africa in 2015 is still intact. However, cement producers could lend focus to growing markets in the region (Sri Lanka and Nepal) and beyond; Africa and GCC that are worth exploring. Pakistani cement producers are a competitive group and could compete with suppliers from Thailand and Vietnam.

The cement companies are running a highly cost efficient ship relying more and more on their own power generation rather than the national grid. Most of these firms use Waste Heat Recovery (WHR) power plants that convert waste into energy. Attock cement will have a 40 MW of coal-fired power plant running by FY18, DG Khan has set up a 30 MW coal fired captive power plant, whereas Fauji produces 12MW from its WHR. Lucky cement will also have its 660MW coal power plant functional in the next few years.

The firms are now running on 84.9 percent capacity utilization (against 77.6 percent in FY15) with surplus capacity of 6.29 million tons, but various estimates suggest the sector will reach 96 percent utilization by FY18. The companies are increasing indigenous capacities (with a combined increase of approximately 30,500 tons per day) in view of projected growth of 15-16 percent per annum in local cement demand, driven by increased infrastructure spending and CPEC-led projects.

With increasing local consumption however, the sector might see a hike in prices owing to a FED introduced in the new budget that will charge Re1 per kg of cement translating to Rs1,000 per ton of cement, while the earlier tax was 5 percent on retail price. If the burden of the levy is entirely borne by the consumer, the current 50-kg cement bag that sells between Rs475 to Rs525 will sell with an additional Rs30-35, accounting for the excise duty come FY17.

Other incidental factors may prove to be a hurdle. Fauji Cement recently had an accident at its factory that resulted in the closure of its second production line that runs on a capacity of 7,200 tons per day. While this could potentially hurt dispatches, the shutdown would definitely take a hit on the company's bottom line with estimates from Arif Habib suggesting a loss of Rs2.29 per share if the plant remained close for a year.

Overall, the cards are stacked up in the sector's favour, with greater demand and cost efficiency that would drive up the bottom lines in the next few years. While the focus for the sector is mainly domestic, if exports resuscitate, the sector will exceed expectations.