If cement industry’s future seemed rather uncertain (read “cement demand fatigue”, Oct 19, 2018), as economy simmers down and the new PTI government shuffles around development expenditure, its near future may not be all that ambiguous after all. In a meeting with Abdul Razak Dawood, advisor to Prime Minister, cement manufacturers were asked to be well prepared to capture the increasing local demand for cement. That’s a solid assurance if there ever was one.
But the government need not worry- the industry is ready. In fact it has been exporting its cement to far off locations, possibly at a price cut, to clear off excess cement it has the capacity to manufacture. The industry has been expanding since end of 2016 and by 2020; it will have raised total cement manufacturing capacity by nearly 70 percent.
The new plants are more efficient than ever before with many equipped with the latest machinery and tech from abroad (mostly Danish) along with installed waste heat recovery units or captive power units to meet some of the energy needs of the new plants. These may help reduce reliance on the grid and ultimately shield cement makers from the fluctuations in prices for global oil and coal.
The current capacity utilization is 80 percent (in 3MFY19) against 85 percent this period last year. As the industry came through with more expansions, it was expected that utilization would come down, resulting in greater price competition. And so it did.
When gauging demand prospects, it was clear that there will be some significant changes as PTI took over from the PML-N. Some were postulating that Imran Khan would want to renegotiate some of the CPEC projects as suggested by his criticism of the previous government and how poorly certain mega projects may have been handled under that regime.
Meanwhile, as economy took a slide, stability measures had to be kicked in. Growing interest rates and devaluation of the rupee were already not painting a growth friendly picture.
Investment in real estate and commercial development was expected to suffer from the economic downturn. Existing housing projects may have gone unscathed but new housing schemes would have become ever more out of the reach of the middle class.
Meanwhile, the PTI government did reduce development spending by axing over 400 projects under CPEC and Gwadar, but these projects had not really taken off. The government also initiated a probe into the financials of mass transit projects but so far, these and other CPEC projects already underway are staying put.
The latest commitment from the government however comes from its pet project, the Naya Pakistan Housing plan that, much to the chagrin of its most passionate critics, will construct five million houses over the next five years. BR Research’s calculations suggest nearly 22 million tons of additional demand every year (assuming, one house requires 400 bags of cement). Even if half of the target is achieved, 10 million tons each year of additional demand means the industry can keep up with the capacity it is adding. So while demand sans the housing plan could wither, with it, cement manufacturers need not worry too much.
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