Cement sector: battle for the South

The country’s cement sector is abuzz with expansion announcements, mergers and acquisitions. Within the past few months, three manufacturers have announced expansion plans. Last week, Attock Cement (ACPL) revealed it will expand capacity by 1.1 million tons at a cost of $120 million. Previously, Cherat Cement (CHCC) stated it will spend $120 million on expansion of 1.3 million tons of cement. Dera Ghazi Khan Cement (DGKC) has also revived plans to add 2.5 million tons at a cost of $300 million.
This news flow has troubled some investors, as they expect the higher production may lead to price wars among cement makers. Stock prices of each of the companies dropped in the immediate aftermath of their respective expansion announcements. Research analysts contend these fears are unfounded. AKD analyst, Jawad Shamim termed the concerns as “overblown”. Despite the soothing calls from market pundits, it is evident that the added capacity will have profound impact on the domestic industry.
In FY15, cement dispatches grew by about 3.27 percent. Given the expectations of heightened construction activity and infrastructure development over next few years, let’s assume the overall dispatches continue to grow by at least 3.5 percent, until FY18. As of today, no other cement manufacturers have revealed plans to expand. The three firms named above; all expect their expansion projects to be completed by FY18.
Based on this information, it appears that the additional capacity in the North region, from ACPL and CHCC will not alter the capacity utilization much over the next three years. Rather, the extra production will come as a stitch in time, to keep up with higher demand.
Capacity utilization in the South region stood at 87 percent in FY15; significantly higher than 75 percent utilization in the North region. Even if DGKC’s expansion is completed on schedule, the region’s cement manufacturers will have to raise capacity utilization further in FY16 and FY17, to keep up with demand. That is so, unless the higher demand is to be filled by players in the North, or through other means.
The dynamics of competition in the South region are also in for an overhaul. At present, Lucky Cement (LUCK) holds about 42 percent of that market. ACPL and Dewan Hattar Cement (DCL), both hold about 21 percent market share, each. After the expansion is complete, ACPL’s share will rise to 30 percent of the South market. Shares of LUCK and DCL will fall to 37 percent and 18 percent, respectively. Rising demand amid stoic capacity may enable some sellers to extract higher prices in the short-run. However, within a couple of years, the competition will heighten.
In an earlier column entitled, “Bestway: the King in the North”, BR Research had highlighted the emergence of Bestway Group as the dominant cement manufacturer in the North region, over the traditional giants DGKC and LUCK. Now the battle for the South has begun. LUCK’s dominance of the region has been challenged by ACPL’s ambitions.