Some trends within the cement sector are clear and cannot be escaped from. That exports will continue to dip as we move into the second half of the fiscal year should be no surprise, even if it seemed exports to Afghanistan were showing a rebound. In 4MFY18, exports to Afghanistan grew by 15 percent—this has dropped to 7 percent in 5MFY18 as cement sales in that market plunged in Nov sequentially. Year-on-year, exports to Afghanistan in the month dropped by 19 percent. This is clearly not a rebound.
Other markets haven’t helped either. Resultantly, exports share in total cement sales are 11 percent in 5MFY18 against 16 percent this period last year, creeping close to single digit rates, according to data based on All Pakistan Cement Manufacturers Association (APCMA).
Local demand however is holding true to projected growth. Average monthly growth over the past five months in local markets has been over 20 percent. Despite the paralysis in Islamabad through the month of November, the government was able to disburse nearly Rs70 billion in Public Sector Development Programme (PSDP) spending, according to data retrieved from the Planning Commission. That is the highest spending in PSDP since we kicked off the year. Though dispatches fell between October and November—winter is a downtime in the north—the growth is evident in year-on-year performance.
Monthly utilization is more than 100 percent of capacity with many cement manufacturers working overtime to meet cement needs. Indeed, despite exports falling by 18 percent year-on-year, in the five months ending November, capacity utilization is at 95 percent against 81 percent this period last year. However this is not likely to persist. During this fiscal year, Attock and DG Khan Cement are expected to bring on their expansions online in the southern zone. This will add around 3.8 million tons to the existing capacity by the time we wrap up FY18 and capacity utilization will loosen up.
Over the next few years, this utilization is estimated to reach 60-65 percent as local demand strives to keep pace. This would affect retention prices which have already headed south in the past few months. If manufacturers want to keep capacity utilization high, the only option for them would be to dump excess cement—whether regionally or to other closer countries—taking substantial price cuts just to sell. This would squeeze margins further.
The troubling pattern of shrinking exports can no longer be ignored. Manufacturers acknowledge that there is a falling demand in some of the key markets for Pakistani cement including Afghanistan, India, South Africa and some Central Asian countries. The problem is probably not a reduction in demand but greater competition by way of other cheaper players like Iran entering these markets or non-tariff barriers such as the anti-dumping duty imposed by South Africa that are together discouraging market access to Pakistani cements.
Over the past months, this column has discussed at length the reason why Pakistani cement will continue to find it difficult to find market access in Afghanistan specifically (read “Cement exports and geo-strategic failures”, published on Nov 21, 2017).
The Iranian supply glut is undeniable while other countries including India are also prepping to enter that market either through exports or by setting up plants in the country.
Manufacturers are now seeking export friendly policies from the government but even if these benefits materialize; higher coal costs, lower retention prices and underutilization of capacity as expansions come through are prominent risks cement players are up against. That is the dichotomy facing the sector—despite robust local demand; all other indicators are turning red.On the consumer side however, competition leading to lower cement prices would translate into reduced construction costs, a silver lining.
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