After considerably raising the bar on growth expectations, the cement sector is settling down for a somber few years. This column predicted that the cement cartel will break by FY20 but it seems it already has broken ahead of schedule.

Despite a growth in volumetric sales (15% in 1QFY18); the average growth in net revenues for the five companies we looked at (see table) was 9 percent as retention prices fell by an average of 12-15 percent since this fiscal year kicked off. Meanwhile, margins have plummeted in the face of higher coal prices, gas tariffs as well as higher FED. On average, margins have fallen to 36 percent in 1QFY18; from 43 percent this period last year. Coals, which constitute 40-60 percent of cement input, saw its prices increase by 65 percent during this period. Combined earnings in 1QFY18 have dropped by 13 percent.

This trend is likely to continue even if coal prices recover. Expansions within the sector are coming on as early as Mar-18 with competition to get intense in the South as it doubles its capacity. Price hikes in the near future are unlikely to materialize as supply increases. Despite infrastructure and housing growth projections, local demand will be unable to absorb the additional capacity completely.

But also couple that with the falling demand oversees for Pakistani cement. In all its key markets—from Afghanistan and South Africa—exports have not managed to sustain. Long before Iraq closed off cement imports from Iran; the latter has been eyeing Afghanistan and adjoining Central Asian countries for its budding cement supply clinching healthy market share Pakistani cement used to enjoy.

Now with Iraq squeezing itself out of the picture, Iran will have an oversupply of cement that it will be dumping everywhere it can. Meanwhile, Tajikistan is sending a fourth of its total cement production to Afghanistan. Czech Republic is investing $70 million in a cement plant (480,000 tons) in the west of Afghanistan. To put that in perspective, that’s nearly 30 percent of Pakistan’s exports to Afghanistan in FY17. Pakistani exports in Afghanistan and similar markets are unfavourable to recover.

It seems the sector is expanding on misguided projection numbers as it will face massive oversupply over the next five years facing a capacity utilization of less than 60 percent by FY20. Local prices here will fall and earnings will be hit. It could be exporting excess cement at significant price cuts but will likely face a backlash in those markets from domestic interests as happened in the South Africa market.