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There we have it folks. The mystery of who gets Dewan cement has finally been laid to rest. Bestway cement (PSX: BWCL) announced just last weeka day after the company announced its half yearly resultsthat it has signed a Memorandum of Understanding (MoU) with Dewan to acquire its North plant (and related assets) located in Hattar, KP. This has been the first time in years that Dewan cement, a sick unit working at half its production capacity and using outdating technology, has been in the news for some good reason.

The news that Dewan was up for sale had been circling for months and rumor was, the Chinese cement giant Anhui Couch was interested in buying it out and officially establish a footprint in the Pakistani cement sector. Clearly, this did not sit well with existing players who would rather remain in the hands of the few local players. In addition to Bestway; Lucky, Kohat and Fecto were all bidding to acquire Dewans plant with a clinker capacity of 1.08 million tons.

Even though Lucky (PSX: LUCK) has always been considered the market leader, the company took second spot to Bestway when the latter acquired Lafarge Cement in 2015. In terms of capacity, the two are neck and neckBestway stands at 7.58 million tons annually; capturing 17 percent of the industry capacity, while Lucky has a combined capacity of 7.03 million tons from its two plants (16% share).

But there is no denying that Lucky has always been miles ahead of the rest of the industry because of the companys strong hold on costs of production, in addition to its grasp in adopting energy efficiency measures. It also has greater brand recognition as well as a wider market reach which all contribute to its impressively high margins. Take the recent financials as an example. In 1HFY17, Lucky reported revenues of Rs23.4 billion compared to Rs25.8 billion revenues reported by Bestway. The former increased sales revenues by 7 percent year-on-year while Bestways sales grew by 22 percent.

However, the picture changes completely when costs are taken into account. Luckys plants are located in the South which does give it a logistical advantage over Bestway. As coal prices have started to rebound globally, cost of production for cement players have increased but less so for Lucky (1% compared to Bestways 15%). Such fundamental control over costs promises margins of 50 percent for LUCK in 1HFY17 against Bestways 46 percentvery high in its own right but still a leg behind LUCK.

Lucky had already announced expansion plans in setting up two plantsbrownfield in Karachi and greenfield in KPto the combined tune of 3.55 million tons. These expansions would ensure that once all the industrys expansions come through (including DG Khan, Attock, Kohat and others), Lucky still maintains its leading position. During the time that these expansions are under construction, Lucky may see a pressure on its profit margins because of higher finance costs.

It seemed Bestway was going to be left behind but the company rose to the occasion, when it announced the MOU with Dewan as well as its plans of adding 6,000 tons per day of clinker to its existing plant in KP. The company made this announcement after it had already signed an agreement with a Chinese company for plant commissioning. The total capacity for Bestway after expansion would go to 10.4 million tons (against Luckys 10.6 million tons). Too close for comfort.

Bestway has its work cut out of for itself. It has to revitalize a sick unit plus invest on a new plant, all the while hoping to cut down costs. This would require serious spending. Even though cement prices in the North have already been adjusted upward as coal prices increased, the pressure on net margins will be high going forward. Lucky on the other hand has a Greenfield project to kick-start which always takes longer and requires more investment.

Though costs of these projects and sources of funding are not available to us at the moment, a lot depends on capacity utilization and ability to pinch a greater market share for both companies once expansions come through.

Copyright Business Recorder, 2017

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