Lucky Cement (PSX: LUCK) is used to being on top. It inspires a certain level of confidence in its investors as it continues to outperform peers in the industry, and outside. The company celebrated the coming of 2020 by announcing the installation and construction of its brownfield expansion at its northern plant in KPK. The new line which has a capacity of 2.8 million tons per annum has already started producing clinker and adds to Lucky’s existing capacity of 9.35 million tons. This brings Lucky’s total capacity up to 12.15 million tons annually surpassing industry leader Bestway Cement which currently hails a capacity of 10.3 million tons. That’s great, except does that change anything?
Not right now. The cement industry has had a rude awakening over the past year as macroeconomic fundamentals nosedived, domestic demand dried up, and price competition grew with companies racing to the market to offload excess cement they were producing and were unable to sell. At a time when demand is pulling back, the industry is coming up with a number of expansions—about 12 million tons in total—which it ambitiously embarked on in FY16. That year, the sector was booming. Lucky Cement’s margins peaked at 48 percent while industry averages were flirting with asolid range of 40-45 percent. Demand projections were steep and inspiring.
Except of course, demand did not keep up with expectations. Over the next two years, the industry grappled with rising costs and volatile retention prices unable to maintain the glory days of 2016. Then came FY19 as the economy headed south and both government spending and private sector investments shrank. Cumulatively, the industry saw margins dip to 25 percent (read more: “Cement’s inverted U-turn”, Sep 3, 2019).So far, even though, dispatches in the north zone have improved in FY20, a healthy dose of skepticism is in order.
In fact, if dispatches keep growing at the rate that they are growing—which is expected (read more: “Clinker is king?” Dec 31, 2019)—the industry will have a capacity utilization of 66 percent by the time new expansions kick in. That’s pretty low for the sector given it has maintained and only grown from a utilization of 75 percent since 2013. Such a vast drop will be a first (read more: “Overcapacity, under-pressure”, Dec 27, 2019) in a long time.
In the first quarter of FY20, Lucky saw its dispatches fall by 14 percent, earnings drop by 62 percent and market share drop to 14.7 percent from 17.5 percent in 1QFY19. Lethargic demand in the south, and similar demand trends in cement being exported overseas has put a substantial dampener on the company’s financial performance, even though, it still remains ahead of the curve. Added capacity might allow Lucky to sell off more clinker to markets abroad which has lately taken a much greater share in total exports of cement companies (about 44%), but capacity utilization might not improve too much. In many ways, it is in the same boat as other cement firms. Perhaps at an elevated position.
It is clear that the expansions that were planned, have to come through and the industry would suffer from increased price volatility as utilization goes down. Too much demand recovery on the domestic front is not expected, even though there are hopes for Naya Pakistan Housing Program (NPHP) kicking off soon. The mantra for now is weathering the storm, until better economic times are upon us.
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