Cement industry up against the wall

It came as no surprise that cement sales remained depressed in the first half of the current fiscal year.
Heavy monsoon floods were the key reason for tepid local demand in 1QFY11. At the same time, supply disruptions caused by the floods, also clamped down on cement exports from Pakistan.
These along with inadequate public spending, resulted in lower local sales during the first half of the current fiscal year that plummeted by 8 percent year-on-year to around 10.1 million tons. On the other hand, exports fell with a louder bang, down to 4.6 million tons from 5.6 million tons in 1HFY10.
Behind the weak exports is excess cement capacity in the Middle East. Therefore, buyers high bargaining power has hauled cement FOB prices down, making exports unfavourable for the cement makers, primarily for manufacturers situated in the north.
Average cement FOB prices stood at $48 per ton during the first half of the current fiscal year, a level low enough to hardly break even. Consequently, cement sales through the sea route alone declined by about one third.
Cement sales to India were the hardest hit on account of non-renewal of BIS certification (a quality control license) for some local manufacturers. In contrast, exports to Afghanistan surged by 22 percent to 2.2 million tons.
The fact that energy cost is also on the higher side, it is quite likely that manufacturers may have recorded weak margins in the 1HFY11.
Still, the second half doesn seem half bad. The market expects local demand to kick start growth after February on the heels of better agricultural income from the Rabi crop.
Although, global cement demand is expected to grow by average 5 percent in 2010 and 2011, according to Portland Cement Associations market intelligence report, but exports from Pakistan are likely to remain under pressure on the back of rising competition in the international market.
However, exports to Afghanistan are likely to register further growth in the second half, driven by development activities. Afghanistans GDP is expected to grow by 8.5 to 9 percent in 2010/11, according to the World Bank.
The upshot is that local demand at the end of the current fiscal year might reach or cross last years level, but growth chances on the export front remain slim.