Cement exports: The wrath of competition

If the official numbers reported by All Pakistan Cement Manufacturers Association (APCMA) are accurate, cement exports are growing. In the four months ending Oct-19, exports were up 16 percent volumetrically. This translates to precious dollars that Pakistan needs, though the share of cement in total exports is merely 1 percent. Given the growing capacity in cement, and dying demand domestically, one would have hoped exports to pick up far more than they have in the past. In fact, in dollar value, cement exports have fallen 10 percent year on year. If the cement industry is so competitive—as we have been told over and over again—why can’t it export more?

Cement manufacturers claim that when exports are low, it is deliberate—that they are merely playing around with the sales mix depending on domestic demand. Whenever domestic demand goes down, they start to export more. Over the past year—safe for the last few months—domestic demand for cement has plunged. Exports as a result grew. But not as much as expected, and not in cement.

In fact, about 44 percent of totalcement exports in 4MFY20 were for clinker against a 26 percent of clinker share in total in the corresponding period last year. Clinker is an intermediate commodity which is used to make cement by adding gypsum to it during the grinding process. This allows cement to “set”. Due to the difference, clinker costs substantially less for importers than cement.By some estimates, Pakistani clinker fetches between $32-35 per ton while cement fetches between $50-55 per ton. That’s a differential of $18 per ton!

Yet, clinker is what Pakistani manufacturers have been able to sell abroad. Meanwhile, cement exports to India have completely closed down due to political tensions, while sea borne exports have fallen by 17 percent. Cement dispatches to Afghanistan have only just started to improve, even though they fell for the better part of last year.

Consider the calculations made in the table. For the sake of consistency, let’s take volumetric estimates of PBS (which are lower than APCMA official numbers). According to these numbers, exports in rupees per ton have actually grown by 15 percent. But compare this to the prices that cement fetches domestically. Cement manufacturers get 1.7x times more in rupee value when they sell locally. Abroad, they have to bring down prices to compete.

This has two very important implications. One, cement manufacturers are still selling at the prices they want in domestic markets rather than the price they will get through market forces. Perhaps, if Pakistan was importing cement, it would cost domestic consumers less, by virtue of increased competition. Two, given the rise in clinker exports, it is clear that even at these prices (which are much lower than domestic prices), Pakistani cement is not as competitive in global markets. Part of the reason may be higher freight and transportation costs which add to the burden, but ultimately, it comes down to efficiencies. Naturally, it makes sense then that Pakistani manufacturers continue to lean on domestic markets where they can dictate prices and face minimal competition—domestic markets is where their profits are maximizing. The question is: what does that mean for end-consumers? That’s something for policymakers to think about.