With cement manufacturers in a stew about growing competition in overseas markets, news that Egyptian government has embarked on a project to massively increase its cement production capacity, further denting their confidence over the future outlook.
The Egyptian government is set to issue eight licenses for cement plants this year, in a bid to increase production capacity to 80 million tons a year by 2015 from 50 million tons at present.
This development comes when two other noticeable cement players in region, Iran and India have already started working on capacity expansion.
Alarmingly, capacity expansion in neighbouring countries doesn bode well for local producers, as they are largely dependent on export markets to support their topline. During the last fiscal year, overseas sales absorbed nearly one-third of cement production.
Lethargic global cement demand along with capacity expansion in Middle Eastern countries, like Saudi Arabia, Qatar, UAE, during the past few years has already done much damage to Pakistans cement industry. Consequently, FOB cement prices have been hovering around $52 per ton, down from $80 per ton during the peak times of 2007-08.
This is further demonstrated by export statistics released by Trade and Development Authority of Pakistan, which show that cement exports to Qatar, Oman, UAE decreased substantially during July-November compared to same period last year.
Therefore, to make up for the decline in Middle-East, manufacturers increased their presence in the African markets, primarily, in Djibouti and Sudan.
But Egypts path towards capacity expansion could possibly arrest Pakistans growing presence in Africa. On the back of its geographical proximity, Egypt will have easier and cost effective route to other African economies.
On the other hand, Irans growing presence in the global cement market also poses a threat to exports from Pakistan, as it enjoys relatively lower cost of production at $23 per ton compared to other regional economies.
Believing that every problem has a solution, regional cement producers are curtailing their costs by shifting towards low cost power resources. Many have also decided to set up facilities closer to either raw material mines or the markets.
In essence, only those cement manufacture will survive that enjoy greater economies of scale and are closer to sea ports.
But the fact remains that the majority of local production capacity is situated in northern areas, which means that maintaining profitability will depend more on local demand and export to Afghanistan.