In the run to 100-days, the PTI government has announced a number of plans that it intends to undertake during its tenure—building the Basha-Diamer Dam to cater to the water crisis, constructing five million new houses to cater to the housing shortage (approx. 10-12 million gap), and green-lighting much of the delayed infrastructure projects. There is a possibility some CPEC projects may not see the light of the day, and others could see timelines stretch. If executed, these should allow projections for construction materials, like cement, to shoot up.
According to numbers reported by the sector’s association, the two months into FY19 have seen addition in capacity and a slower growth in local markets and traditional export markets. The latter is a trend witnessed since FY17.
August has been weak compared to July, possibly due to the government transition—the month sales compared to last August were 8 percent less, and compared to July fell by 3 percent. The bump witnessed last month in sea route exports do not seem to be a fluke even though in August they fell by 12 percent, against July—sea borne exports have more than doubled since August of last year. It seems companies are going an extra mile and selling excess cement abroad which is not being absorbed by domestic markets. Afghanistan and Indian markets are still important, but the importance is not translating into numbers.
The sector had a tough FY17 despite announcing a host of expansions. As mentioned in an earlier column on the subject: “exports were falling because of decreased demand in key markets, input prices were rising due to global commodity price hikes and currency depreciation, and retention prices were falling as the sector entered a competitive phase with ample supply at the consumer’s disposal. Together this concoction of factors led to plummeting margins for cement manufacturers (by an average of 25-30% across companies)”. Read: “’Concrete’ plans”, Aug 27, 2018.
https://www.brecorder.com/2018/08/27/435198/concrete-plans/
Capacity utilization in 2MFY19 seems to have come down, as expansions for Lucky, DGKC, Bestway and Attock have come through. Another 20 million tons or so will be further added by FY21. Earlier projections for the sector have been a growth of 8-12 percent but it could easily be more or less, depending upon circumstances and government policies. In fact, estimations made by BR Research suggest that if one million houses are constructed each year in the country, the additional demand could be 22 million tons.
This is based on rough estimations assuming each house is 1000 sq.ft, land for each house of that size, 400 cement bags are used. These numbers would differ of course if the construction is vertical, and if house dimensions are different. But it is safe to say, housing construction could be a huge impetus to cement growth and surpass most of the earlier projections based on CPEC-related activity.
There isn’t anything that hasn’t been said about cement exports. Afghanistan is becoming a more difficult market for Pakistan owing to a number of factors including cheaper cement from Iran, investments into the market by other Central Asian countries, and new plant being set up in the home market that is estimated to be 30 percent of Pakistan’s current exports to Afghanistan. All these paint a sobering picture for the accessibility of that market. Indian market on the other hand is a small one where importers get Pakistani cement to avoid inter-state taxes. Pakistani cement in India is also $25-30 per ton less than Indian cement in that market.
Cement companies have been adjusting their sales mix and have diverted focus toward farther away markets. Sea borne exports were 3 times that of exports to Afghanistan in 2MFY19 which is a strong indicator of how FY19 will last. At least, cement makes have other markets to go to, even if they have to take a price cut to keep utilization high.
Macroeconomic changes in the economy as the government embarks on an austerity drive may see a slowdown of real estate and commercial development. Imran’s plans to change the priority of some infrastructure projects are also a threat to cement growth. But if local demand persists in the infrastructure domain and further grows in the trajectory as promised by the housing overhaul, cement manufacturers may hit new highs.