Cement overcapacity woes

Spokespersons for the cement industry - part of All Pakistan Cement Manufacturers Association (APCMA) - believe that the industry will be operating at a much reduced capacity utilization by the end of FY20 (estimated to be 78%) given current demand trends and the recent expansions that have come into the sector. This is not too surprising, and the warning bells had already been rung. Though in 1HFY20, sector dispatches still showed a solid growth of 6 percent. The gains, however, are not as well-distributed.

Location matters. In the case of cement, government projects taking place in the north of the country benefit north zone players, and same is the case for the south. Transportation costs simply make it more viable for factories closer to the projects to be supplying construction materials. Meanwhile, overseas exports are an advantage point for south players as they are located closer to the port. The most recent demand trends suggest that while demand has improved in the north (mostly private consumption), in the south that recovery has not come at all. This has resulted in south players to turn toward exporting clinker.

In fact, total exports have grown to 18 percent of all dispatches in 1HF20, up from 15 percent this period last year. Of this, clinker constitutes 46 percent of all cement exports. Part of the reason is that not only has the Indian market closed for Pakistani businesses, sea borne exports in cement have also seen a slowdown (down 17%). Although cement exports to Afghanistan have improved (up 46%), it is merely making up for the loss of market access for Pakistani cement in India. The net gain between the two cross-border importers is nearly nil compared to last year. Importers are looking for the intermediate product clinker which is also cheaper than cement. It is probable that it is may be more competitive in key markets.

Delayed execution of the Naya Pakistan Housing Program (NPHP) is also making cement makers nervous. After all, the mammoth project was going to generate an additional (estimated) 10 million tons of demand each year if it were to construct 1 million houses. We know now that putting up a million houses is no joke and may not even be possible at this point given only approval of only a handful of pilot projects in Punjab. Even so, government’s promise of a subsidy as well as cut in taxes on construction materials does indicate that the project will take off - at some time, TBD.

Until such a time, given the current slowdown in growth, demand for construction will also remain lackluster. Cement manufacturers need a much longer-term export plan given their fear of reduced capacity utilization hurting bottom line - which it unequivocally will.