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The cement industry kicked of the new year with a slowdown in dispatches due to heavy rainfall and snow across the country. Total dispatches in 7MFY17 stood at 22.9 million tons against 21.3 million tons during this period last fiscal year, growing by 7.5 percent year-on-year. This growth is lower than the 9 percent growth witnessed in 1HFY17 and 10 percent in 5MFY17 year-on-year. The month of January saw a month-on-month decline of 13 percent clocking at 3-million-ton cement sales against 3.55 million tons sales in December.

This downtrend can be largely associated to local dispatches that take up more than 75 percent of all dispatches. Combined local dispatches in the north and south saw a growth of 9.5 percent in 7MFY17 much lower than 11 percent in 1HFY17 and 12 percent in 5MFY17 year-on-year. Dispatches within the country declined by nearly 15 percent between Dec-16 and Jan-17.

Exports on the other hand were not nearly as disappointing as the past year or so and saw a 2 percent increase between Dec-16 and Jan-17 mainly due to an 11 percent increase in exports to Afghanistan in Jan. It would be too soon to say whether exports to Afghanistan would see a turnaround. Cumulative exports declined by 3.4 percent between 7MFY17 and 7MFY16 with a decline in exports to Afghanistan as well as other destinations with the exception of India that grew by 80 percent year-on-year.

This column has at length discussed the reason behind the deceleration of exports, particularly to Afghanistan (Read our detailed report Reviewing cement exports, published on Jan 18, 2017). Due to cheaper Iranian cement, Pakistani cement continues to get a tough beating in that market compared to this period last year.

Since Afghanistan is a primary market for Pakistan, and there is no change in the receptiveness of that market, the outlook remains sobering. On the one hand, the country is still reliant on aid for development and the overhaul in infrastructure is not expected to break records but on the other hand, the country imports most of its cement, and only has two working cement plants; the bigger of which is facing a cancellation of mining contract from the Afghan government.

Perhaps, Afghan imports would increase but we would hold judgment on whether a greater share would go to Pakistan. As of 7MFY17, exports to Afghanistan constituted 40 percent of all Pakistani exports while this was 44 percent in 7MFY16. To compare, this share used to be 52 percent in 2013.

Not putting all its eggs in one basket, Pakistani cement players have explored other export markets, particularly across many African countries, with nominal success. South Africa was a major market but the country has been cutting down on imports due to a weaker construction sector. South Africa also imposed an anti-dumping levy on Pakistani cement which makes it expensive and uncompetitive.

While cumulative exports to India have increased during this fiscal year compared to the period last year; since July, Pakistani exports to the country have fallen nearly by 40 percent. The country is also in for an expansion in capacity from 395 million tons to 421 million tons by the end of 2017 which could pressure Pakistani exports that are considered cheaper in several proximate Indian markets.

Predictably, not many cement players seem concerned by declining exports, and much of the conversation in Pakistan on cement has to do with the immense growth potential of the sector driven by domestic housing and infrastructure demand. Some estimates place the growth between 12-15 percent annually. Banking on local demand alone, most of the players have also announced plans to expand their existing capacities which cumulatively stand at 25 million tons to date.

Over the past two years, profits for cement firms have rapidly expanding boosted by lower coal prices and investment in energy efficiency which has brought costs down. But none of the benefit of improved efficiency and lower input prices, together with growing demand has ever been passed onto consumers in terms of prices. This despite a substantial duty on imports. In fact, as coal prices rebounded recently, it was reported the prices were increased by 12-20 percent to sustain margins that go between 40 to 50 percent.

Certain news reports also suggest that the All Pakistan Cement Manufacturers Association (APCMA)though this does not come from a direct sourcewould like the government to impose a regulatory duty on cement imports due to smuggling and/or dumping. But this would be a wrong step. Smuggling should be curtailed at the border through strict checking and regulation, while dumping should be tackled by the National Tariff Commission (NTC) after receiving an application to that affect from cement players.

All of these issues have been taken up by this column in the past few months and we will continue to shed light on them. While consumer side problems may remain, it is interesting to watch cement stocks surge and investor confidence soar. The cement sector is writing a very strong and stable growth story in the manufacturing industry. One to certainly write home about.

Copyright Business Recorder, 2017

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