Cement cycles

Another expansion in the cement industry is in the offing which will take capacity up by 18 million tons over the next two years as demand expectations come to a head. Over the next four months, if demand continues to grow month on month — in 8MFY21, industry sales have grown by 14 percent — the industry could be reaching its maximum capacity before the fiscal year ends.

Bolstered by these demand prospects — which will likely ramp up next year as projects under the Naya Pakistan Housing and potentially the construction package break ground — the industry is expected to turn bumper profits, especially with favourable pricing in the domestic market and particularly before the expansions come in. The Naya Pakistan Housing Program has a mark-up and cash subsidy available for the next 100,000 mortgage borrowers. In order to utilize this, demand for housing projects will grow persistently over the next year, until at least the government’s commitment to the subsidy remains intact.

Before cement capacities increase however, demand would continue to take the lead —exceeding supply — causing a quintessential seller’s market where revenues across the board can flourish. Many south players have been heavily selling clinker overseas which is positive for offtake and keeping plants running, but less than favourable for overheads and from the revenue perspective as clinker sells cheaper than cement.

These firms— with the exception of Lucky which has a tight business model and a great command over optimizing its dispatch composition — may find reprieve as domestic demand takes over the sales mix. Already share of exports in total sales has reduced from last year. This will continue to come down.

On the expansions front, SBP’s TERF facility will substantially reduce the burden on financing costs as cheaper borrowing is available for long-term facilities. Many of the cement firms are availing this program which will undoubtedly improve returns over the span of the loan. Undoubtedly, it is exciting times for the cement industry, even if the rest of the economy is not as hopeful.