The construction boom is driving the cement sector in full-throttle. Total cement dispatches for 10MFY16 stood at 31 million tons, a 10 percent increase year-on-year, recording its highest ever dispatches last month. While the outlook for the sector remains robust on the back of growing local demand, April has seen a one percent year-on-year fall to 3.51 million tons. This decline is largely associated to an eight percent decline in local dispatches from the south block and a fall in exports to Afghanistan and South Africa.

According to data released by All Pakistan Cement Manufacturers Association (APCMA), dispatches from the northern block have been increasing consistently month-on-month, as well as in the corresponding months of FY14 and FY15. Dispatches from the southern block with a 20 percent share in total dispatches have had minor fluctuations in month to month growth, though year-on-year growth maintains a strong upward trajectory.

Data shows a bump in capacity utilization standing at 84 percent in 10MFY16 as opposed to 77 percent in FY15, with a total production capacity of 45.62 million tons. Overall production capacity in the cement sector has in fact tripled in the past decade.

Where local sales of cement manufacturers have been phenomenal (Luck Cement, DG Khan Cement, and Bestway in the lead in 9MFY16), consolidated profits of major cement manufacturers have also been on an upward trajectory. These firms saw a 33 percent, and 27 percent year-on-year rise in earnings for 3QFY16 and 9MFY16, respectively.

Better local setting has offset the effect of falling exports, which are half of what they were in 2010, particularly to the top two export destinations: South Africa and Afghanistan. Exports to South Africa fell by 46 percent year-on-year in 2015 owing to an anti-dumping duty ranging from 14-77 percent that the country imposed on Pakistani cement. Exports to Afghanistan have been falling for some years, witnessing a drop of 12 percent in Mar-April 2016 alone, which is a 23 percent decline from exports in Mar-April 2015.

Though it carries only a quarter of the total export share, India is proving to be an emerging market with exports going from 42,000 tons in July 2015 to 134,000 tons in April 2016. Exports to India that observed a growth of over 25 percent year-on-year in 10MFY16 has been increasing since 2014 due to improved logistics and a surge in demand from Indian Punjab.

Production will continue to climb in the coming fiscal given declining global input prices. Coal prices for instance have significantly decreased in the past year driven by record-low demand coming from the slowdown of the Chinese economy which is busy tackling its rampant pollution dilemma. If South Africa lifts the additional levy, and exports to Afghanistan bounce back given improving security conditions, total exports may resuscitate in the long term.

The industry however is not banking on international demand; it is scaling up locally given the outpouring of infrastructure investments, in which CPEC maintains a huge part. In anticipation, the sector is investing up to $1 billion to enhance capacity. Last year, Lucky Cement announced the construction of 2.3-million-ton Greenfield plant in central Punjab. DG Khan has commissioned a 3.1-million-ton plant in Hub, Balochistan, which will be operational in 2018. Cherat is installing a new production line along with a Waste Heat Recovery System (WHR) with a capacity of 4,200 tons per day, operational by 2017.

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The sector is likely to ride the wave of low cost and high demand in the coming fiscals. All the major cement houses are moving toward power generation to decrease reliance on the national power grid. DG Khan set up a 30 MW coal fired captive power plant while Lucky cement already has a 180 MW captive power generation facility and has added a WHR in Karachi to cut down costs further. This cost-efficient scenario coupled with low fuel costs have translated into soaring margins for the cement industry. Improved exports would be a bonus.

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