Pakistans cement industry has gone through hard times over the past few months. After the devastating floods, the industry witnessed a decline in sales during the first quarter on account of supply disruptions and tepid constructional activities across the country.
In sharp contrast to market projections that had expected local cement demand to show signs of growth during the second quarter, local cement demand didn pick up during October and November.
A confluence of negative factors pruned local cement dispatches by 9 percent to 8.3 million tons during the first five months of FY11 compared to the same period last year. With construction activities relatively lethargic during the winters, local cement demand may remain tepid till the end of January.
Poor local cement demand has come at a time when the cement makers are already nursing dull exports. This can be gauged from the fact that cement exports during first five months of FY11 squeezed by 18 percent to 3.92 million tons compared to last year
Exports are winding down on account of falling demand amid growing capacity expansion in the region. The major stumbling block is lower FOB prices - which are hovering at $47 per ton, against an average of $50 per ton same period last year.
In such a scenario, only southern players will be able to stand competition as they pay far less freight charges compared to their northern peers to transport cement to the seaports.
Export prices are low enough to slowly phase out the smaller manufacturers from the export market as even the larger ones claim to only break-even at these rates.
This leaves the northern players with no option but to export through the land route, to Afghanistan and India. But, exports to these two destinations are not without impediments.
Since surplus capacity has triggered a price war amongst the northern manufacturers to compete for exports to Afghanistan, pushing prices down to $42 per ton, it is highly unfavorable for the supplier to remain profitable at such a low price level.
In addition, cement exports to India are also suffering on the back of a delay in renewal of BIS (Bureau of Indian Standards) certification for some local manufacturers.
Given the scenario, growth in the cement industry purely hinges on uptake in local demand. Realising the fact that economy is still in a rut, the demand will depend on how quickly the government gets the post-flood construction projects up and running. Only a handful of cement makers are optimistic that major restructuring activities will kick off within this year to help the industry register growth for FY11.
Last of all, amid escalating commodity prices, primarily coal, and freight cost, it seems that only those companies can post improvement in profitability that can adopt cost efficiency measures and have clean balance sheets.
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