That the cement industry operates in a cartel is no secret. History suggests that the cartel breaks every time the industry goes into expansion mode. This column flagged this issue in 2017 (read: “There exists a cement cartel”, July 11,2017) and predicted that the upcoming expansions which will take up the industry capacity to over 72 million tons (up 62% from 2016) will result in lower capacity utilization and companies will be battling it out for market share.
Three new capacities are coming up in the next few months. To top that, the demand nosedive has only worsened the situation. Team-Imran is focusing on stabilization measures. PSDP cuts are cutting deep. South players are exporting clinker (32% of all exports) to make up for lost local demand but North players are in a bigger bind, domestic dispatches slid 11 percent in 9M, while their exporting markets mainly Afghanistan and India are dying down. Post-Pulwama and ongoing tensions have all but shut down trade between Pakistan and India while Afghanistan is opening doors for other cement exporters which leaves Pakistani cement makers out in a lurch.
Some channels checks are suggesting that in just the past week local cement prices have fallen by Rs20-25 per bag in the north region as the race to market picks up heat. Others are suggesting this price slide to be conservatively between Rs8-10 and not more. However, the likely scenario is that the price slide has been different for different markets in the north—some more than others. Based off of PBS weekly SPI numbers alone, between Feb 28 and April 4, average cement prices have fallen by Rs30 per bag in Islamabad, Rs18 in Peshawar, Rs8 in Multan and remaining stable in Lahore. One cement player has argued that prices have remained in flux for a while and they tend to adjust week after week.
They believe that the recent price slide is a short term phenomenon and there is no major price war to the levels of what we have seen happen in the past. They argue that in fact, domestic demand is being compared to last year which was one of the best years for cement. The real demand in the market is still there. They dispensed the market notion that cement industry is in dire straits and plants are shutting down. If some companies are putting plants offline, it is strategic based on stock inventories, it was argued. Yet others fear that any production line shut down is a major tell for what is to come.
One thing is clear: rising capacity and falling demand isn’t the best combo for cement manufacturers. If prices remain on the current level, it would put a major dampener on cement manufacturers’ balance sheets specially those who are bringing up new capacities and have to pay off their debts in a timely fashion. Policy rate hike doesn’t help.
However, price competition isn’t the worst for consumers. Estimates suggest that while cement exports fetch $50-55 per ton, and clinker exports $32-35, in domestic markets, cement manufacturers get between $93-110 per ton (based on today’s dollar rate). That is a substantial differential. If price competition continues with capacity utilization under increased pressure, end-user consumers will enjoy the fruits of it.
Though analysts opine this is all short term, in principle, price fixing, supply limits and quantity quotas do not point toward a healthy dynamic and competitive industry. If the cement cartel is dead, do not resuscitate. Let the market do its job.
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