The new government is in its first 100 days with PM Imran at its helm is proactively forming committees for the various issues that need to be tackled—of these, CPEC committee was formed just two days ago set to reprioritize projects and meet targets. Are all the infrastructure projects on track to finish in time? Even so, that uncertainty does put a question mark ahead of ascertaining industry’s demand- specially cement and steel which two major inputs are going into construction. The other factor that brings ambiguity in understanding cement demand is the declining cement exports to key markets. The third factor is the foreseeable demand for construction materials coming from the housing sector.
On the CPEC and infrastructure development front, there may be some shake-up. It has been recommended that the Western Route be completed on priority which the previous government had delayed while the mass transit projects will go under audit. While the commitment to finish projects already underway is visibly there, there is an understanding that there may be a revisiting in terms of viability of projects and some may not see the light of the day.
This adds ambiguity into projecting construction demand. The cement sector wrapped up FY18 with a phenomenal 14 percent overall growth in volumetric sales where local dispatches grew by 15 percent. It ended on a high note with 93 percent utilization—a first in its two-decade run. Seeing demand dynamics and its own capacity hitting the ceiling, the sector had embarked on a journey of raising capacity by 72 million tons, which will be absorbed by the industry if demand remains consistently strong. Otherwise, the sector will enter the underutilization phase which doesn’t bode well for the bottom-line.
Exports will not help. The Indian market is expected to become ripe for Pakistani cement—the latter is cheaper in some areas than Indian cement while in getting cement from Pakistan, buyers are able to avoid inter-state taxes. This paints a positive picture for Pakistani exports but it is clear the share that we can export is targeting a select few proximate areas. The market size will always remain small.
Afghanistan on the other hand for which Pakistani cement manufacturers were the biggest suppliers has been taken over by Iran’s cheaper cement. The economy seems price sensitive, which is why Pakistan has lost a good share of that market. Moreover, the country is also setting up its own cement factory to plans, produce about 30 percent of Pakistan’s current exports to it—that’s not great news (read: “’Concrete’ plans”, Aug 27, 2018). It seems the industry is shifting gears and marketing/selling to other markets which is the right move as creating a market for themselves will help them any time the local demand is not meeting expectations.
The third factor is housing. PM Imran promised constructing five million houses during his tenure which is a promise made by many a governments in the past, and implemented by none (read: “Playing for houses”, Sep 5, 2018). Supposing the plan is implemented, if each year the economy sees a construction of one-million houses, the cement demand could go up by 22 million tons.
For the sake of consistency, this calculation will hold true if each house has a covered area of 1000 sq.ft and each house on average require 400 bags of cement, each of 50-kg. Of course, if low-cost houses are constructed, they will have half the covered area. Numbers may also differ in the case of high rise buildings or construction in the outskirts. In FY18, the industry sold 45.8 million tons. Being very optimistic, if infrastructure and CPEC projects continue as planned, this housing demand may catapult the sector on its head.
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