With domestic demand experiencing a dip, cement manufacturers have been selling off their surplus inventory to regional markets perhaps with a cut to their margins. This is not how it was supposed to be.
Only last fiscal year, the industry was enjoying the spoils of massive infrastructure development that was central to PML-N’s economic agenda. But much has changed since. The new government is pursuing stabilization efforts which have led to monetary tightening and currency depreciation. After cutting the PSDP expenditure, the releases have been slow. Private sector construction is not breaking any ceilings either. The sector is officially deep into its backup plan: exports.
Nearly half of the construction demand in Pakistan comes from mega development projects while the rest is covered by commercial and housing construction. With the restriction on non-filers to purchase properties of more than Rs4million, real estate activity is not as vibrant. Meanwhile, for a good few months into the fiscal year, high rise construction was banned by the highest court in Karachi. The southern zone however is still performing better than the north.
The former enjoys the advantage of proximity to the port which gives the players better exportability options (in terms of costs) as compared to the players in the north. The depreciating rupee may have facilitated exports at comparatively better margins, however, they remain at least $10 per ton lower than domestic sales given additional costs of transportation. Sea exports grew by over 200 percent in the seven months period, though it is important to note that nearly 65 percent of this is clinker exports. Firms are more prices competitive with clinker than with cement.
It is also unfortunate that markets like Afghanistan which took up more than 50 percent share of Pakistan’s cement exports are no longer as welcoming. In 7MFY19, they fell by 22 percent year on year. That market is not only being flooded with more affordable Iranian cement, other regional players have also been eyeing it. Some may attribute the frequent closures at the borders and political tensions between the two countries to be a driving factor into Pakistan losing its market share but it seems the issue with cement is economics. Other cement entering that market is simply cheaper and Afghanistan is finally diversifying its trade relations as well.
Many of the new expansions in the industry are online, others are on the way. At the current pace of domestic demand slowdown and rise in sea exports, the capacity utilization is expected to remain at 85 percent which is not all that bad. If exports continue to take up 15-20 percent share in total dispatches, domestic market will take care of the rest. The PSDP spending with foreign funding projects related to
CPEC highway and motorway and the bus rapid transit (BRT) are on track which may keep the demand for cement at an encouraging level. Though, the restriction on non-filers on the purchase of property may limit new constructions. On the other hand, if Khan’s ambitious housing plan (read “Naya Real Estate-I”,
Feb 6, 2019) can bring even half of the promised one million houses per year, it would add between 5-10 million tons of additional cement demand (based on various estimates: read “Cement: Toughen up!”, Jan 15, 2019). In any case, it seems unlikely that any construction will start before FY20. This leaves the industry with its export-push plan which may prove favorable to the south players while keeping overall dispatches on the same level as last year. Though margins will take a massive beating all around, market leaders and mid-players alike (read: “unlucky times for lucky”, Jan 31, 2019).
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