Despite robust growth, the cement industry has experienced its fair share of ups and downs over the past year or so. Exports have been falling, input prices have been rising, retention prices have fluctuated given the changing dynamics of the industry and neither of the latter two has helped with cement manufacturers’ margins which have taken a tough beating the past year (dropping by an average of 10-12 percent for prominent players in 9MFY18). On the other hand, facing under-capacity, much of the sector has embarked on a journey of expansion—expected to raise capacity to over 72 million tons by 2021. There is no denying that despite not having a financial victory, the sector is preparing for the long haul—and doing it well.
Bolstered by infrastructure development projects as well private sector development in real estate and housing, the industry grew by 14 percent in FY18 year on year (FY17: 4%; FY16: 10%, FY15:3%), close to projections of 12-15 percent. This is the highest growth the sector has seen since 2008.
On the expansions front, Lucky, DG Khan Cement, Bestway and Attock have already added capacity in the last few months of the fiscal year. And despite the added capacity, the sector ended the fiscal year at the highest capacity utilization in history. This growth is almost entirely being carried by local demand as exports have fallen to only 10 percent of all dispatches (FY17: 12%; FY16: 15%; FY15: 20%, and so on).
In fact, exports have seen quite the slide. Pakistani cement started losing market share in the Afghan market since FY15 when sanctions to Iran were lifted. While some market share was lost, Pakistan still likely caters to half of the Afghani cement demand—which is about 10,000 tons per day. Extrapolating it for 300 days, the share of Pakistan in FY18 came around to 61 percent.
That’s not bad at all. However, before Iran, Pakistan was primary supplier of cement with nominal shares coming from other nearby locations.
Moreover, the country is set to produce more of its own cement and cut down on imports. The Ministry of Mines and Petroleum (MoMP) in Afghanistan issued a tender for a cement factory to produce a million tons annually.
This is easily 30 percent of the country’s current imports; and will cut into Pakistani exports.
Other markets such as South Africa and India have remained weak amid tariff protections and local suppliers expanding capacity. Even so, exports grew by 2 percent overall.
Local manufacturers also claim that exports are not falling as much as cement makers have smartly been adjusting the sales mix in the face of growing local demand. That may be true but it is also clear that traditional cement exports market are evolving and may not be as easy to penetrate as before.
On the cost and revenue front, the industry saw its FED per bag raised to Rs75 (per 50-kg bag) in the latest budget from Rs62.5 last year. Coal prices jumped to $120 per ton just last week and grew by over 30 percent during FY18. The rupee depreciation against dollar now stands close to 15 percent. All these factors are contributing to an inevitable price hike.
Average cement bag prices rose from Rs549 (per 50-kg bag) to Rs561 between May-18 and June-18. Particularly in the north for example, between Feb-18 to July-18, prices were raised by 10 percent, 8 percent, 12 percent and 16 percent in Islamabad, Lahore, Multan and Peshawar, respectively.
On average, price per bag for the sector is already up by Rs42; Islamabad by Rs52, Lahore by Rs56 and Peshawar by Rs75. While there is a lot of uncertainty on currency depreciation, the coal price increase is not expected to continue.
Analysts believe coal prices will start to decline toward the end of 2018 and may average at $74 per ton by 2020. While demand is expected to slow, prices will fall as China and India increase coal output.
Expansions and persistent local demand are encouraging. If demand continues in the current vein, the sector may not enter over-capacity and may not have to bring down prices. Together these paint more or less a positive future, with some bumps on the road that are unavoidable. Moreover, sliding exports will pose a threat once the local flurry of activity dies down.
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