The cement sector closed off FY17 with the highest ever dispatches in the sector’s history—clocking at 40 million tons and running at 86 percent of the capacity. Falling exports, however, cast a dark shadow on expected overall growth going forward. Despite those reservations, the sector kicks off FY18 with a 56 percent growth in local dispatches; and a 2 percent growth in exports. The turnaround—though it is too soon to call it that—comes from a 40 percent increase in exports to Afghanistan in July 2017 against this month last year.
Analysts attribute stronger sales this July compared to last to the lesser working days last year due to Eid holidays, but the Afghanistan exports do come off as a surprise. Not much has changed in terms of circumstances in that market. Iran continues to capture a chunk of market share and has in fact been expanding its capacity to cater to the demand in Afghanistan, Central Asia and other regional countries. It would be rather premature to celebrate the increase in exports to that market.
Calculations based on figures reported by All Pakistan Cement Manufacturers’ Association (APCMA) show that though capacity utilization this July reached 87 percent compared to 61 percent last year; it is not because of any so-called turnaround in exports. In fact, exports share in all dispatches fell from 20 percent to 14 percent in July 2017 year-on-year.
According to cement manufacturers, they simply adjust their sales mix when they have to take a significant price cut in exporting markets. In Afghanistan, cheaper Iranian cement makes Pakistani cement much more expensive. In India, Pakistani exports had been increasing last year because of the price cut of nearly 15 percent Pakistani cement takes to sell to that market. In South Africa, a once prominent market for Pakistan imposed a 5-year anti dumping duty on Pakistani cement which they accused was being dumped into the country. Because of all these reasons, cement players have been cutting down on exports—simply not being competitive in their primary markets.
The onus falls entirely on local demand which is expected to go up by 8 percent year-on-year. Despite the whole Nawaz ousting fiasco, and political tensions, it seems unlikely that any of the CPEC or CPEC adjacent infrastructure projects will hit any significant snags. Housing and real estate demand will continue to contribute to strong cement dispatches. Keeping this in view, the sector is expected to bring over 28 million tons online by FY20.
On the other hand, depending on one market for all sales is rather irresponsible. This especially when the sector by its own claims is energy and cost efficient (most plants are modernized and have waste heat recovery units installed to cut back on power costs), bragging gross margins of 40-42 percent on average. Aren’t there benefits to diversification? While it is true that taking price cuts is not the best for the bottom-line, competing in foreign markets is the best way to continue improving in terms of efficiency.
With the entire sector investing so heavily on expansions, some efforts could be beefed up to market products to other countries especially near and surrounding the region. They should be keen on competing in other markets and gain a foothold. It would certainly pay off as they expand their capacities. The sector is growing, but its sustainability is still a question in reserve.
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