Exports: barely rescuing cement

Cement companies don’t have a choice but to lend focus to exports, but it seems, even there they have few offerings to pick from. As domestic demand and domestic retention prices ebb and capacity expansions come through (read: “Price games!” Oct 10, 2019), numbers certainly show a marked increase in exports, except not in cement and not to traditional trading partners. Companies are selling off more clinker than cement, and they are exporting more overseas than cross-border.

This is the best they can do, though the dynamics are causing the divide between the north and south players to widen. Cement companies that are only operating in the north zone are facing an increased level of competition as the capacity in the region is much larger, and demand is falling short. As more companies race to the market to sell off excess cement, prices have become volatile. In comparison, players operating in the south enjoy relatively stable prices that move up, rather than down—staying ahead of prices in the north. This does bode well for north companies that also have plants in the south.

But there are other factors that are affecting players in the north far more. Cross-border markets such as India have closed down completely due to political tensions between the two countries. During FY18, exports to India constituted 26 percent of all cement exports abroad, which came down to 11 percent during FY19 with Indian countervailing duties of 200 percent taking effect in Feb-19 and exports halting in March. If that market had remained open, a good share of cement could find its way there, and possibly at more competitive pricing, even grow.

Then there is also Afghanistan. At one point, more than 50 percent of all cement exports were going to Afghanistan until the tide turned during FY17 onwards when cement supply into the market became less receptive due to reduced demand, high Iranian imports into the market, and the country building its internal capacities as well.

However, south players are also not selling their higher priced cement overseas. In fact, over the past 14 months, clinker contributed to 33 percent of all exports. This share in Aug-19 was 50 percent. On the upside, there is space for Pakistani commodity to still be sold abroad, on the downside; it is in the weaker of the two products: cement and clinker. Clinker is typically used to make cement by adding gypsum in it so it is an intermediate product. Estimates suggest that while cement exports fetch $50-55 per ton, clinker exports fetch $32-35. Compare this to domestic markets where cement manufacturers can fetch between $93-110 per ton. Based on today’s dollar rate, domestic prices range between $83-90 per ton. Typically, the difference between domestic and foreign prices is around $40-50 per ton which is well, a ton!

For north players, it is already more costly to export via sea. If they were exporting clinker, it would not do any favours to their margins.

In Aug-19, exports have climbed up to 20 percent of all dispatches, and may even grow further which would take care capacity utilization and top-line growth but will keep pressure on gross and net margins.