Cement: exports riding in the back seat

It is very clear now that the future of cement industry rests on expectations of domestic demand, where exports will play a small supporting role, comfortably letting the local market dominate the narrative. In FY21, despite being in the midst of a pandemic, the industry grew 20 percent in volumetric size from last year. If one were suspicious of that being the base effect, rest assured, these sales stand steadfastly on top, making any comparisons futile.

In fact, total volumes are the highest they have ever been, crossing the 50-million-ton mark for the first time ever. The growth itself is also higher than the CAGR accomplished in the past 15 years—about 8 percent. The new high has come after a massive expansion that the industry went through between FY16 and FY19—with almost all cement makers raising capacity in unison—to reach about 70 million tons annually. The capacity utilization now stands at about 80 percent (about 75 percent last year) which has triggered another expansion cycle coupled with the high demand expectations.

The new expansions which would provide about 100 million tons of cement to the market is an increase of 42 percent in size over the next three years. If the industry grows by 15 percent annually and all the new plants become operational, the capacity utilization in Year-3 would stand at 87 percent which would trigger another cycle of expansion—if current demand dynamics persist. The future of the Naya Pakistan Housing Program (NPHP) and however many of the 5 million houses will be built does depend on who is in power, so one can only be sure of the next two years.

The domestic growth so far has come on the back of a revival in the economy. Any of the Naya Pakistan Housing Program related projected growth, as well as, construction amnesty scheme, has not materialized yet. These projects together with hydro power plants is making the anticipated growth of 15 percent even possible. As this demand is channelled, the industry which is keeping exports share between 10-20 percent every month (also around the same annually since FY16) will sell less overseas. In domestic markets, cement manufacturers have pricing power which would only get reinforced when demand soars—consumers have little to no sway in the matter as imported cement is unheard of.

But unlike other industries, cement manufacturers have actually worked on building efficiencies by not only investing in capacity enhancement but also installing waste heat recovery plants and captive power production which has cut down their dependence on the grid. Their production efficiencies have allowed them to access market overseas. At one point, Pakistani cement dominated the Afghan market until Iran came and changed the game. In fact, Pakistani cement in South Africa was being sold at a dumping price which had caused their government to slap an anti-dumping duty on Pakistani cement manufacturers.

The one challenge is imported coal which does make manufacturers vulnerable to international coal price dynamics which in the most recent case of coal price rally will cause earnings to drop (read more: “Coal rush). But rest assured, prices in the domestic markets will follow suite. The future of the Pakistani cement industry right now is in the green, despite being one of the least environmentally green commodities.