Lately the prices of scrips belonging to cement
sector have gone up substantially due to investors' keen interest,
mainly due to recent increase in cement off take. However, many sector
analysts warn that the sector is heading towards a situation, worse than
that faced in mid nineties, due to planned expansion. They also warn
investors to apply restraints or be prepared for the losses.
The recent interest of investors in cement sector was
mainly due to improved earnings, resulting from higher off take, lower
cost and reduction in the CED. Though, cement sales are expected to
remain high, the only cause of concern is the recent capacity expansion.
Though, the cement cartel has remained effective so far, once the
enhanced capacity comes on line, it may not remain so effective.
According to Arshad Arif, Head of Research, KASB
Securities, "Cement makers are showing turnaround via high demand
and managed prices. But at the same time, their usual ill visions are
likely to tame this mega bull story. At the moment, almost all the
cement makers are dreaming of capacity expansions. They want to exploit
the current low interest rate environment and bull market sentiment to
raise further capacity in a market, which is already operating at around
71% capacity utilization. Doesn't this sound familiar to what we heard
during 1994 while visiting most of the Northern companies? The cartel is
a temporary phenomenon, which will eventually see its logical death at
the hands of players. Thus investors must not show too much excitement
in the cement sector. Though there is an upside potential, the downside
is more visible in the long run and in all likelihood it will be more
painful compared to 1994".
The present market's romance with the cement sector
is not very old. The story started with temporary developments like the
cartel's formation to pressurize the government to lower its taxes, saw
some fundamental logic owing to coal related efficiencies and loan
re-profiling of debt. However, investors' current enthusiasm does not
match with these one time changes, rather the sentiment towards this
sector is much stronger, more or less similar to what was witnessed in
According to the data released by All Pakistan Cement
Manufacturers Association (APCMA) during the first 8 months of the
current financial year, demand has seen an increase of nearly 13% to
over 7 million tonnes whereas February was an exceptional month with
22%YoY growth. The local market was slightly less exciting with 9.5%
demand growth whereas exports have shown a 195% YoY improvement. The
capacity utilization figure for the year remained at around 71%. Though,
demand growth is significantly positive, the momentum of this growth is
slowing down slightly, particularly in the local market where the
industry started with a 14% growth rate and is now experiencing a lower
According to an analyst, "Pakistan is passing
through its worst times in terms of the sanctity of trade practices.
Name any industry and Pakistan appears to be setting standards of
forming inefficiencies. Auto, cellular telephony, steel, synthetic, and
cement are just some of the names. Despite the hue and cry from the
general public and the international financial institutions, the
government has failing miserably in curbing such practices. The
continuation of the cement cartel is a curse and the government and its
functionaries are living with it. The formation of the cartel to jack up
prices to over Rs 220 per bag, not passing on any benefit to the end
consumers from the CED reductions and the continued short supplies in
the market are the norms".
A perfect bull story can be made for the cement
sector. The demand side is very strong whereas the manufacturers are
posting healthy gains by maintaining high prices, though they are doing
some cheating which the government is allowing. And the market has shown
a strong positive reaction towards this so far. The only relevant
question is of the sustainability of this scenario.
According to an analysts, "One of the reasons
investors have been losing money in equities market is that they base
their decision on past performance and mostly overlook earnings
potential. The recent past of cement sector may be glorious but it may
be very bleak keeping in view about 10 million tonnes addition in
The sponsors of cement companies must also think
twice and must not add capacity only because interest rates are low.
Adding capacity may be easy but optimizing capacity utilization may
prove too difficult. The expansion being undertaken by Lucky and D. G.
Khan Cement is based on export of cement to Afghanistan. Can others also