Cement’s diminishing outlook

In the months leading to the close of FY19, one thing was clear—this year would chip away at volumes, margins and profitability for the cement industry beyond expectations. The industry had embarked on greenfield and brownfield capacity enhancements hoping that “game changing” CPEC would turn their fortunes around whilst riding the wave of an expanding economy courtesy heavy government spending, and believing the growth rates would sustain. They wouldn’t, as players would realize that later. Estimates suggest now that domestic cement off take would fall this year for the first time in seven years.

According to a sector research report published by Topline Securities, domestic dispatches will drop by 3 percent, while total dispatches will increase 1 percent in FY19 with the sales mix shifting in favor of overseas exports by south zone players. Cumulatively, exports are expected to increase 37 percent with cross border exports falling by 19 percent while sea-borne exports rising by 141 percent.

The last set of official numbers from All Pakistan Cement Manufacturers Association (APCMA) confirm that the expectations are in line with 9M numbers, though exports by south players seems to have taken off dramatically since March. According to the report: “The new cement markets situated in East African and Far Eastern countries coupled with heavy clinker sales to Bangladesh; available due to the scarcity of supply from Vietnam have significantly added to the export sales of the region”.

While the slowdown in demand coming from large infrastructure projects, real estate commercial projects or the housing sector has pushed demand down, the race to capture higher market shares had also become urgent as cement firms have put in heavy investments into the sector against depleting revenues. Price competition, especially in the north zone has further toughened the market. For north players, it has been specially tough as both Afghanistan and India have been less receptive.

As opined earlier: “With the Indian market all but closing down, and the Afghan market opening doors for other suppliers, the northern players are suffering far more than those in the south. For north players to reach seaborne markets, the margins may be too narrow due to transportation and freight costs and the retention prices they eventually get” (read more: “Cement: exports to the rescue”, April 2, 2019).

In FY19, capacity utilization will have fallen by 11 percent to 84 percent. Since the southern players recovered their volumes through exports, this capacity utilization is still decent enough. On the downside, they fetched lower price abroad. High cost scenario, together with low revenue per ton sold paints a gloomy picture for the bottom-lines of most players, some being worse off than others.