There are two dichotomous trends in the cement sector right now. The first is that even when the demand for cement is heading north; prices for cement scrips in the stock market have pummeled over the past year or so, wiping out much of the build-up they witnessed when expansions were first announced. Top cement players’ margins have shrunk from 43 percent to 36 percent between the first quarters of FY17 and FY18 as coal prices rose and retention prices in the north were reduced (Read “Cement cartel breaks”, published on Oct 30, 2017).The second more troubling trend is the peaking demand for cement in local markets against a visible decline in demand for Pakistani cement overseas. These trends are setting the tone for volatility in the sector going forward.

Local demand is meeting high expectations. Capacity utilization in Oct-17 reached 108 percent as some cement manufacturers, especially in the north, are working overtime to meet demand. In the four-month period, this utilization stood at 93 percent against 78 percent this period last year. This utilization comes despite a 16 percent decline in exports.

Dispatches in the north are on the drivers’ seat flocked by the infrastructure boom. In fact, many players in the south are selling cement to companies in the north who are running at maximum capacity. As winter approaches, there may be seasonal downturns in the north over the next few months. However, the sector is prepared to absorb at least the first set of expansions coming through during FY18 and FY19. Thereafter, the sector will see substantial idle capacity as all the planned 30 million tons of expansions come online.

Exports share has declined to 12 percent in total dispatches in 4MFY18; against 17 percent this period last year. Whereas some cement manufacturers claim exports aren’t falling as much and they are merely diverting sales toward local markets from exports; others acknowledge that there is a falling demand in key markets like South Africa, Afghanistan and other Central Asian countries, which is worrying. In fact, the Afghanistan market has been seized largely by cement from Iran, which suffers from a supply glut. Meanwhile, new local manufacturing plants are being set up in Afghanistan that would further usurp Pakistan’s share in that market.

Cement exports to India were growing last year, but they reached a ceiling as it was predicted. This year, even those select markets in India where Pakistan could compete with Indian cement aren’t very receptive. Indian manufacturers are expanding capacities fast and trying to reach more local markets, which are geographically closer to Pakistan and where Pakistani cement manufacturers took a price cut.

There is no argument that once additional capacities start rolling in, Pakistani local demand will not be able to fully absorb it and the sector will be left with ample idle capacity. Manufacturers may need to expand their reach toward other strategic export markets where Pakistani cement could fare well without having to dump cement for cheap and lose a good share of their margins. They are vying for export friendly policies from the government in order to keep exports afloat.

Until such a time when said policies kick in, and coal prices rationalise, cement manufacturers are in for an uphill battle to maintain margins at the levels they have been enjoying for a long time. From the consumer point of view however, cement prices will fall further and cost of construction may come down.