Cement exports and geostrategic failures

It isn’t news that Pakistani exports have dramatically been falling since 2015. Exports share used to be upwards of 35 percent of all cement sales in 2011 which fell to 24 percent in 2014 and now down to 12 percent in 4MFY18. This troubling trend will seem even more daunting if we consider the dynamics coming into play that are contributing to the declining demand for Pakistani cement overseas. If Afghanistan was proving to be a tough market to keep before, latest developments suggest it is only downhill from here.

India and Iran will soon usurp the Afghanistan market with the new transit trade route launched via Chabahar port. Whereas Pakistan was the only route from Afghanistan to India; political skirmishes had hindered connectivity. Now this alternative route allows Afghanistan and India to establish stronger trade ties, with Pakistan left in the lurch. India is the second largest cement producer undergoing expansions to bring its 420 million tons to 550 million tons over the next five years. With the new trade route, it is clear that Pakistani cement exports to Afghan market that were already losing market share because of Iran will decline further.

To review: until 2014, more than 50 percent of Pakistan’s cement exports were being sent to Afghanistan. This fell to 37 percent by FY17. In the past few months, cement exports to that market have recovered slightly but it seems short lived. Iran has all but single-handedly stymied Pakistan’s chances of growing its exports to Afghanistan. The country suffers from a supply glut with 70 million tons of capacity that it cannot locally absorb with no infrastructure development in the works. It is targeting markets in Central Asia and the Middle East and North African (MENA) regions for a bulk of its sales, aside from Afghanistan selling its cement at cheap rates.

Iraq which was a major market for Iranian cement (65% of all Iran exports) has now imposed hefty tariffs to support local production. Iran is left with a huge share of its cement that it has to divert to other markets. Afghanistan, Central Asian and MENA countries; even the Balochistan region of Pakistan fall into this displacement plan. In yet another move, Czech Republic is investing in a 480,000 tons cement plant in West Afghanistan. To put that in perspective, that’s nearly 30 percent of Pakistan’s exports to Afghanistan in FY17.

Now in a strategic move to perhaps pressure Pakistan to open Wagah border for Indian products, Afghan President recently imposed a restriction on Pakistani trucks to enter Afghan mainland. This would prohibit the access of Pakistani trucks carrying Pakistani goods for onward transportation to Central Asian countries. While Pakistani exports to these countries are insubstantial, these remain potential markets for Pakistani cement. Only now it is not cost effective to reach them.

So what about exports to India? Pakistan was exporting a small share to some of the Indian markets which were geographically closer to Pakistan but where Pakistani cement took a 15 percent price cut. But Indian expansion plans and local players’ ability to reach far out markets will soon drive out Pakistani cement. Numbers are already corroborating this—exports to India fell by 23 percent in 4MFY18 year on year.

Data for now belies future outlook. Despite dawdling cement exports, the industry has managed to enjoy the spoils of domestic demand now running at 93 percent capacity which is the highest in many years. But the industry is also expanding. From FY19, the country’s domestic demand won’t be able to absorb all of its capacity and cement players will be left with dumping cement to any country that would have it but simultaneously bruising their margins.

This column has criticized cement manufacturers for not promoting its exports and exploring emerging markets for its cement. On the other hand, the government’s role cannot be underestimated. Afghanistan is a major market for Pakistani exports, cement in particular, so there needs to be a focus on improving and streamlining connectivity. The disinterest in trading with Afghanistan comes from merging politics with economics. Borders close down often and trucks are stranded. Unnecessary documentation at borders and penalizing exports instead of incentivizing them are not conducive to good business.

Secondly, Pakistani policymakers should be clamoring to gain access into new markets for products like cement which are good quality and exportable if for no reason but that they bring dollar income! The barrage of trade deals that Pakistan has brokered with its trading partners should seek concessions for cement which would help reduce reliance on traditional markets like Afghanistan. No doubt failures are adrift but some contingency plans can be built given the right motivations.