Cement: anybody's game

In a latest announcement, Bestway Cement (PSX: BWCL) has pulled out of buying the Dewan (PSX: DCL) cement's Hattar plant, other assets and mining licenses. Dewan is now back in the market and it's unclear how others who were in the running to acquire it are approaching this. Bestway is leading the market for now with the highest capacity in the sector but after expansions by other companies, it will move down a spot. Bestway was supposed to add 2.8 m tons to its capacity, including a million tons of Dewan.

Meanwhile, KP government has awarded 14 mining licenses (for limestone and shale) to set up cement factories in the province including to listed companies such as Bestway and Gharibwal, whereas some licenses were awarded to new firms. An investment of $2.5 billion is expected to enter the sphere through these licenses.

Our estimates until this news suggested that the industry will see over 60 percent growth in capacity from its existing 45 million tons in the next few years. The new expansions would amount to nearly 30 million tons, but the KP licenses issued to new companies could change the game.

We do not know how much capacity this could potentially add. But it will be an uphill battle to launch new projects by firms that will be starting fresh, compared to seasoned players. Cement is a high demand industry right now, but a lot of factors will go into how successfully new firms can kick-start. The sector is capital as well as energy intensive and normally it takes about 3-5 years to set up a new plant after acquiring a mining license. How many of these companies with mining titles would actually go through with their project remains to be seen.

Existing players have invested heavily into becoming energy efficient and bringing up their margins to as high as 40-45 percent on average in the recent past. Energy availability and costs will remain a major deterrent for new players entering. And it is unlikely, even if some of these materialize that they would give immediate competition to cement firms who have been operating in the region for years, and have substantial market share, and in some cases, brand loyalty. Market penetration may not be as easy as it looks.

But we are cautiously optimistic. The expected demand brought on by infrastructural and housing development will leave room for many to play. From a regulatory point of view, there should be effective quality assurance mechanisms in place as more players begin to enter. In the long run, competition is a great tool which could curb rent seeking, bring prices down and offer quality products to end-users. At least, that's the hope.