The year-on-year growth in cement dispatches is testament to the strong demand that is coming from construction and development activities in the country that have continued well through Ramadan. In the period 11MFY18, local sales rose by 16 percent year on year while, in the month of April, they rose by 14 percent against the month last year; in May by 2 percent. Estimated demand projections were 10-12 percent which led cement manufacturers to plan capacity enhancements over the next three years in order to cater to the additional demand. So far, Lucky, DG Khan Cement, Bestway and Attock have all added capacity.
Exports on the other hand show a 1 percent growth in the 11MFY18 period year on year, declining by 6 percent month on month in May; but rising by nearly 42 percent during the month year on the year. There is something to say about the receptiveness of Pakistani cement in the Afghan market. Unfortunately, one cannot say for sure where these exports are coming from as the cement manufacturers association is no longer disclosing destination wise export numbers for public consumption. Until 10MFY18, exports to Afghanistan has grown by 9 percent year on year and by 27 percent between Mar-18 and Apr-18.
Afghanistan imports its cement from Pakistan, Tajikistan and Iran where Pakistan’s share used to be more than 50 percent. However, Pakistani cement lost a chunk of the market share when Iran’s cheaper cement flooded the country. BR Research guess-estimates suggest that Pakistan still caters to about 50 percent of the Afghani cement demand; and monthly average so far is around 160,000 tons against 149,000 tons last year.
Should this trend continue, arguments can be made on both fronts. While Pakistani cement exports have started to recover, Iran and Central Asian players are vying for greater market share in that market due to proximity. Afghanistan itself is hoping to add a million tons of own capacity. The country currently imports around 3-3.5 million tons of cement. On the flip side, US sanctions on Iran could deplete Iran’s market share in Afghanistan, so Pakistani cement suppliers still have hope.
Until now however, exports have not been a cause for major concern as local demand has more than made up for any decline. However, capacity expansions of nearly 30 million tons if all plans go through are expected which will lead to a good chunk of idle capacity that local demand cannot keep up with it.
This will also see cement prices recede due to overcapacity.
Companies have raised prices recently to safeguard their falling margins (dropping by an average of 10-12 percent for prominent players in 9MFY18) owing to rising cost production brought forth by coal price hikes and rupee depreciation. Average cement bag prices rose from Rs549 (per 50-kg bag) to Rs561 between May and June. These may also have come about as the FED on cement bags in the recent budget was raised to be Rs75; against Rs62.5 last year.
However, these prices cannot be sustained when capacity utilization goes down. Currently, it stands at 95 percent in the July-May period, working on maximum capacity until April. With cost of production rising, increased FED, and looming underutilization, the sector may suffer going forward, despite consistent local demand. Exports could offer some reprieve but not if the sector relies on traditional export markets and does not explore new ones.
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