Cement’s growth myths

Iranian cement apparently, is its Pakistani counterpart’s kryptonite, and not in the romantic sense. It appears the country has single-handedly poached nearly half of the quantity of Pakistani cement since 2015. Meanwhile, some of it is being smuggled into Pakistan and sold for cheap in Baluchistan. But some cement players have a different view: they are quick to claim that exports are not falling because of the decrease in demand in foreign markets but the eruption in demand here in Pakistan, leading the sector to merely adjust its sales mix. That may in fact be true; why take a price cut in exporting destinations when you can sell here at better rates, right? Sure, but how sustainable is that? Let’s examine.

The first point is that demand for Pakistani cement is rapidly falling from all directions. Where it used to be 35 percent of all exports in 2009; it has fallen to 12 percent share in 2017 and path going forward is downward. Iran is one of the top cement producers in the world with more than 70 million tons of capacity targeting its cement into the Middle East and North African (MENA) regions. Strategically, Iran had been exporting its cement to war-stricken Iraq—in fact, nearly 65 percent of its cement was going to Iraq in 2015. Meanwhile, Afghanistan became one of the largest purchasers from Iran post lifting of sanctions pricing Pakistani manufacturers out of the market.

If Pakistani cement makers believe the Afghan market will see a turnaround, it should think again. In April-17, Iraq slapped a 45 percent tariff on Iranian cement to give an advantage to domestic players. This means the biggest share of cement from Iran going to Iraq will have to be diverted to other markets as Iran can only send clinker to Baghdad now.

Moreover, Iran is expanding its capacity to cater more to Afghanistan and Baluchistan, the latter is where Iran has a strategic interest as well since the region holds a large community of Hazaras. Tajikistan is sending a fourth of its total cement production to Afghanistan which is only increasing. Czech Republic is investing $70 million in a cement plant (480,000 tons) in west Afghanistan which will be matched by local investors in that country. To put that in perspective, that’s nearly 30 percent of Pakistan’s exports to Afghanistan in FY17.

Couple that with the border tensions with Afghanistan; Pakistan should really be making contingency plans. Exports to India had been increasing but again, it is a small market that Pakistan is targeting, taking a price cut of nearly 15 percent. South Africa imposed an anti-dumping duty that will last another 4 years. Sri Lanka and some African countries may offer respite but contingent on Pakistani manufacturers’ marketing efforts.

Now the claim of cement producers that they adjust their sales mix toward domestic in lieu of exporting markets is true as they face margin attrition when exporting. Capacity utilization reached 87 percent by FY17; and more than 95 percent in some months during the fiscal years. While both North and South players are expanding capacities; since a bulk of domestic demand is in the North, the region will be less affected by exports over the next year or so.

It seems the industry is expanding (by nearly 30 million tons) keeping in mind a 10 percent year-on-year increase in domestic dispatches, not accounting for a decrease in exports. With these ambitious numbers in mind, the industry will be able to maintain a capacity utilization of more than 84 percent by FY22.

But since local dispatches grew by only 4 percent in FY17 and exports fell by 20 percent; it is not realistic to assume a 10 percent growth. We estimate a 6 percent domestic growth for FY18 and a 3 percent growth year after year as the country enters an uncertain political phase. This would result in 61 percent utilization by FY21 keeping exports constant. If exports fall however, as a strong case can be made here for it, the sector will see capacity utilization fall to 59 percent by FY21.

It is clear that dependence on local dispatches will not bode well for the cement industry. It will have to fight locally on prices and have a bulk of idle capacity. Exports allow manufacturers to keep becoming more efficient in order to compete. Having a diversified market portfolio also allows them to adjust for the ups and downs in domestic demand that are expected in an economy like Pakistan which is far from stable. How to retrieve exports share should be an agenda for manufacturers going forward.