The fiscal year so far has been tough on cement manufacturers. But while the cement industry may be damp for now and for another few months, there exists a silver lining ahead for big players of the industry.
Followed by 22 percent cut last year, development expenditure is feared to be slashed by 31 percent (Rs 200 bn) this year, where the biggest hit, as is usually the case, is faced by physical infrastructure. This, amid the worsening law and order situation and economic slowdown at home has hit hard on domestic cement sales. Overseas sales haven fared too well either. Data released by the Federal Bureau of Statistics show that cement exports dropped by 23.4 percent to 1.7 million metric tons in the first quarter FY10, compared with 2.24 million tons in the same period a year ago.
Fortunately for cement makers, however, the weakness in exchange rate, which fell 12 percent in the quarter, and better export prices, clipped the fall in export earnings to 12.5 percent. The industry earned $125.3 million in the first quarter as against $143 million last year.
If falling topline revenues weren enough, the industry faced a fine of Rs6.3 billion slapped by the Competition Commission of Pakistan that broke the industrys cartel and thus their pricing power.
These conditions have forced some cement makers in the countrys north to shut down operations temporarily due to high cost of production, low market prices, and profitability issues. Chances are that those from the low tier cement firms, such as Gharibwal Cement, Dandot Cement Limited, Dewan Cement, Flying Cement and Dadabhoy Cement Limited, which haven suspended operations so far, will be compelled to do so in the future.
And here in lies the silver lining for the big players. These small players cumulatively hold about 20 percent of total market share, which can potentially be grabbed by bigger players, notably Lucky and DGKC, operating in the region.
As for prices, things look stabilizing as well. Historically, cement sales have been fairly lower in winter season followed by a recovery in early spring - a trend that keeps prices moving along with it.
Although, price fixing is unlikely after the suspension of cartel, these demand supply mechanics should prop up prices by the last quarter of current fiscal year. Hence, the price of cement is expected to reach around Rs270-280 per bag from its current level of Rs230-240- taking the full year average to about Rs250 per bag.
Meanwhile, other big players like Lucky and DGKC continue to seek new export markets with plans to capture demand in South Africa and Sri Lanka. Even Bestway Cement is eyeing overseas market in order to offset the dampening impact of domestic climate. So, while the industry may not be able to achieve its lost glory, one thing is sure; only the big, who have the capacity to sustain, can survive the market.