The cement sector has officially entered the under capacity phase where capacity utilization in the month of March crossed 100 percent while in the period of 9MFY18, utilization reached 94 percent. The growth of 15 percent during the period year on year—local dispatches growing by 18 percent—comes at the back of public expenditure for infrastructure development, CPEC related upheaval, and construction in the commercial and housing sectors. Meanwhile, exports too have seen a slight up tick, though it would be premature to call it a “turnaround”.
The association of cement manufacturers has been arguing for some months that high duties and taxes are impacting domestic consumption resulting in higher end-user prices—total impact being Rs154 per bag. Of this, the Federal Excise Duty (FED) stands at Rs62.5 per bag which the association believes should be brought down to zero.
Though taxes are high, the industry raises prices whenever it can. Earlier this year, cement prices in the north had slid as Cherat cement’s expansion came through. In fact, subsequent expansions would have led to underutilization which would consequently have forced manufacturers to drop prices at the cost of their margins. However, that never happened since all expansions in the north were put to an indefinite halt by the order of the apex court due to some environmental issues raised in multiple courts of Punjab. (Read: Cement in Chains, Jan 23, 2018).
The rupee depreciation of 9 percent against the dollar together with price hike of coal which is a major raw material pushed up cost of production for manufacturers over the past few months. No longer threatened by overcapacity, manufacturers raised prices by up to Rs60 per bag. According to Pakistan Bureau of Statistics (PBS), the average price of a cement bag was raised from Rs538 to Rs543 end of March; against Rs548 this time last year. The price hike continues as in the first week of April, an average cement bag costs Rs552. Prices for players in the south have historically remained high but North players are now trying to catch up.
While local demand in both the north and south are flourishing, exports have seen a marginal recovery. Exports to Afghanistan grew by 42 percent between Feb-18 and Mar-18; but in the period 9MFY18, by only 3 percent year on year. Export growth is seen in patches and is likely seasonal. Period wise growth was negative for Indian and other sea-route markets like South Africa. Neither of these markets will offer any relief. While the latter retains an anti-dumping duty on Pakistani cement, the former is seeing a substantial drop in domestic cement prices on the back of falling demand. There are also a couple of expansions coming through to increase capacity. This scenario does not make Pakistani cement attractive or competitive.
Meanwhile, Afghanistan where some growth is seen may be incidental rather than a meaningful indicator or trend. Not only is the market flooded with cheaper Iranian cement, the country’s own manufacturers are now hoping to capture a great market share. The Ministry of Mines in Afghanistan is working on a plan to produce more of its own cement and cut down on the import bill.
This policy will not be conducive for Pakistani cement exporters who have already been displaced significantly by Iranian, Indian and other Central Asian players entering the Afghan market.
Exports as a share of total cement sales are holding at 10 percent in 9MFY18 (12%: 9MFY17). For now, this can be a healthy buffer as long as local sales continue to increase. In fact, it is even possible that continued growth in demand without expansions coming through would lead to an adjustment in sales mix by manufacturers. Having already reached maximum capacity utilization, a decline in exports isn’t really a problem. Not at this point at least.
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