The cement sector is not in trouble yet but there are misgivings about certain trends that are emerging now, that warrant a deeper look. Lets quickly look at the numbers for February: total dispatches in 8MFY17 grew by 6 percent year-on-year (as opposed to 8 percent in 7MFY17) clocking at 26 million tons. In monthly numbers, February saw a slight drop in dispatches from this month last year but since January, cement dispatches have grown by 11 percent as weather improved in the north. (Read last months story: Cement: Hopes held high published on Feb 13, 2017)
Local dispatches for the period 8MFY17 grew by 9 percent year-on-year, lower than the average of 10 percent the sector has been growing at since the start of FY17. Sales in the South have remained between 17-18 percent of all local dispatches. The real pressure on sales numbers is coming from a rapid decline of exports.
As this column has talked about; the prominent export destinations for Pakistan are becoming ever more difficult to penetrate. In February, exports fell by 46 percent year-on-year while the drop is a 9 percent year-on-year decline for the period 8MFY18. Majority of Pakistani exports go to Afghanistan but it has become difficult of late, as cheaper Iranian cement has flooded the Afghan markets Pakistan cannot beat on price. It was predicted that exports to Afghanistan would decline by 10-15 percent during 2016, but they have come further down during the current fiscal. They have in fact, fallen by 26 percent between 8MFY17 and 8MFY15.
But Iran might not be the only reason why Pakistani cement may not be finding a market in Afghanistan in the near future. Other neighboring countries such as Tajikistan have reportedly started to export to Afghanistan through its shared border. Given that Pakistan recently shut its own border with Afghanistan due to the political tensionswhich are likely to linger going forwardAfghan importers might find options elsewhere.
Meanwhile, the country is also reopening a 20 year old plant with a capacity to produce 100 tons per day. This will nominally add to the local capacity which caters to 6 percent of the domestic demand through the countrys only one cement plant.
The situation hasnt changed much in other markets either. Exports to South Africa and other countries declined by 23 percent in 8MFY17; and 21 percent between January and February. South Africa is witnessing a slowdown in its consumption, and the anti-dumping duty imposed on some Pakistani cement suppliers has significantly cut down any competitive advantage Pakistani cement had in that market.
Exports to India have been a pleasant surprise since the start of 2016 (grew by 43% between FY15 and FY16) but we predicted early on that the jump in exports to India may not hold on for very long. India is the second biggest cement producer with 210 large plants across the country; and is also expanding. Pakistani cement enjoys a price advantage over Indian cement (approx. 15 percent less) in certain locations such as Amritsar and Mumbai.
If Indian cement suppliers can reach the markets that Pakistani cement is reaching easily, and manages to cut down prices, the dent on Pakistani exports will be significant. We already hear price cuts may be in the offing. That the success of Pakistani cement in India may be short-lived is already starting to reflect in numbers. In the first month of this fiscal year, exports to India grew by 222 percent year-on-year; but since the growth rates have shrunk101 percent in Sept; 77 percent in January and dropping by 1 percent in February.
Notwithstanding the failure of finding more receptive markets, the sector is still operating at over 90 percent of the current capacity. As per our calculations so far, over 28 million tons of expansions are planned for the next five years by sector players which will take up capacity to 72 million tons. (Read our detailed report on the subject: Cements race: No finish line published on March 9, 2017).
On the grievances front, cement players feel the government is not doing much to curb smuggling of cement through Baluchistan. We hope to do a detailed story on the subject as well build on our earlier narrative on cement imports and duty implications. Watch this space for more on that.
The overall picture for the sector is still positive based on optimistic local demand projections which cement players are banking on. It is worth noting that the drop in exports is higher than anyone was expectingthe share of exports in total dispatches has reduced from 16 percent to 14 percent in 8MFY17. The share used to be at least 35 percent prior to FY16. Starting February, exports are entering a danger zone.
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