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Record sales of cement in March 2018, process continue unabated

Cement production in Pakistan increased to 3,644 tons in January from 3,459 tons in December of 2017 taking an increase of 185 tons in a one month period. Cement production averaged 2,296.42 tons from 2003 until 2018, reaching an all-time high of 3,691 tons in October of 2017 and a record low of 864 tons in May of 2003.

According to the figures released by the All Pakistan Cement Manufacturers Association (APCMA), the total cement sales in March 2018 were 4.652 million tons, the highest ever in the history of the cement industry. This was 17.33 percent higher than the sales of 3.965 million tons achieved in March 2017.

Domestic consumption was 4.260 million tons out of which 3.543 million tons was consumed in the northern part and 0.717 million tons was consumed in the southern part of the country, depicting a growth of 13.52 percent.

Cement exports surged to 0.392 million tons that was 85 percent higher than the exports during the corresponding period of the last year. During the first nine months of this year, the industry sold 34.758 million tons of cement, which was 14.70 percent higher than 30.304 million tons despatched during the corresponding period last year.

In the July-March period, domestic cement sales from the north were 25.881 million tons, up 19.3 percent, while exports were 2.431 million tons, down 3.78 percent. Domestic cement sales from the south were 5.426 million tons, up 11.83 percent, while exports were 1.014 million tons down 17.38 percent.

Exports started improving in February 2018 and have continued to improve in March 2018 as well. Exports from the north increased mainly due to the sudden surge in exports to Afghanistan that increased from 0.037 million tons in March 2017 to 0.106 million tons in March 2018. The capacity utilization of the industry for the nine months of the current fiscal is 93.74 percent, the highest ever in the history of the industry.

The monthly cement production capacity of the industry is 4.120 million tons while in March 2018, the industry despatched 4.652 million tons, posting a capacity utilization of 112.91 percent for the month.

Pakistan would continue to post healthy growth in the cement sector, which is the only industry in Pakistan that has shown faith in Pakistan’s economy and has continued to enhance its capacities. The local dispatches have increased considerably due to construction activities and could further increase substantially if smuggling of Iranian cement into the country is curbed.

The customs duty on import of both clinker and cement should increase to a uniform rate of 35 percent and only be allowed if Pakistan Standards and Quality Control Authority certifies the quality. The cement industry was among the highest contributors to the national exchequer over the last few years with a contribution of Rs110 billion in 2016-17.

Currently, federal excise duty (FED) on cement is Rs1, 250/ton, which is Rs62.5/bag. The government should reduce FED to ‘zero’ to cut the per bag price of cement and encourage cement consumption which is affected by high taxation.

The demand for housing is on a consistent incline, and some estimates suggest, every year this shortage expands by 100,000 houses. Among other reasons, property price hikes and continually rising building and material costs have exacerbated this gap.

There does not seem to be any slow-down either. Several domestic and international factors are coming into play in the cement and steel industries that will inflate construction prices going forward.

The commodity is one of the flourishing industries in the country growing on the back of China-Pakistan Economic Corridor (CPEC) and infrastructure related development across the country.

The sector’s LSM growth in the seven month of fiscal year 2018 was 10 percent year on year while its domestic sales were up by 19 percent in the eight month of fiscal year 2018. Earlier this year, cement prices had started to slide down particularly in the north because of Cherat Cement’s expansion, but they have started to revive back strongly now.

 

Contributing factors

The rupee depreciation of 9 percent against dollar has automatically increased import costs. The cement sector imports coal as a major raw material that has itself seen a price hike globally. Together with the weakening rupee, the higher costs had to be passed onto the consumer, given that the industry is confident it won’t lose its market if it did.

Another big contributor in building costs is steel. The local industry had been heavily lobbying for protection from imports for years. However, the existing regulatory duty of 15 percent on all other steel imports from all other countries was also raised to 30 percent.

Meanwhile, imported steel could become even more expensive. With China expected to cut down production of steel by 20 percent over the next few years, demand may outpace supply leading to steel prices climbing globally.

On the other hand, Trump’s latest steel tariffs which essentially closed the US market for steel importing business may lead to a supply glut across the rest of the world. Some fear trade diversion which could pressure prices as well.

Cement outlook for 2018

Pakistan receives a mixed outlook for 2018. Pakistan’s cement industry is expected to face a series of challenges in 2018 such as decreasing profitability, high interest rates and an increase in coal prices. These factors make a high profit margin for the sector unlikely in the coming years.

Reports show that cement bag prices have been placed under pressure by the opening of Cherat Cement’s second production line in the northern region. Alongside this, international coal prices rose by 23 percent in the first quarter of fiscal year 2018 to US$91.50/t when compared to the year-ago period.

The recent depreciation of PKR against US$ by 4.7 percent will increase the interest rate. This is expected to lead to a slowdown in economic growth, resulting in a low demand for local cement dispatches.

However, 2018 is also election year in Pakistan. Therefore, the local demand of cement is likely to rise as construction work designed to attract the support of voters takes place.

The southern region of Pakistan is forecasting a 5.2Mta increase in capacity by the end of fiscal year 2018, whilst in the northern region a total capacity expansion of 15.6Mta could be active by fiscal year 2021.

These upcoming capacities are expected to generate a price competition between industry players.

Cement industry of Pakistan is experiencing consistent growth since 2011. This growth is attributed mainly to increase in national consumption, thanks to various infrastructure projects including CPEC.

National Compound Annual Growth Rate of cement has been 7 percent in the last 5 years and 10.5 percent from the year 2014 to the year 2017. This trend of growth in the local consumption is expected to continue with an expected growth rate of 10 percent during the current year and 3 years CAGR of 8 to 10 percent up to the year 2021.

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