The cement sector exhibited tremendous growth in
2004. Analysis of 18 companies (10 in North and 8 in South Zone)
listed on the Karachi, Lahore & Islamabad Stock Exchanges reveals
41.82pc growth in sales to Rs29,787m, 19pc growth in cement production
to 13.64mnMT, 160pc growth in exports to 1.11mnMT and exports
contributing 8.20pc to total production. This level of production was
attainable due to a whopping 80.70pc capacity utilization, up from
66pc in 2003. The following analysis does not include Chakwal Cement
(recently acquired by Orascom Intl.) and Mustehkam Cement that have
been out of operation for many years.
Taking a longer view, CAGR from 1999-2004 comes out
to 10.74pc. Having breached the CAGR by over 30pc in 2004 is a strong
indication where the cement sector is headed. Operating profits
industry wide grew by 290pc to Rs6,174mn. Gross profit margins
improved to 36.89pc from 23.40pc in 2003. Operating profit margins
improved to 20.73pc from a mere 7.54pc in 2003. Most significant
improvement was seen in the bottom line growth, with net profit
margins becoming positive from — 0.23pc in 2003 to 13.14pc in 2004.
The renewed impetus comes from increased construction and housing
activity in the last year, budgetary support in form of reduced CED,
import duty cuts on paints and building materials, consistent raw
material prices for steel and cement, positive developments in
construction of infrastructure projects, and opening in export markets
of Afghanistan, Dubai and Qatar.
Benefits of aforementioned growth have led DG Khan
to report a market share of 13pc, followed by Maple Leaf at 11pc. In
the export market, Cherat Cement operating at 100pc capacity proved
successful in attaining a 17pc market share, followed by DG Khan at
15pc. Better export prices have also supplemented growth.
Region wise, North Zone took 74pc of the chunk of
production at 11.775mnMT, while South Zone took the rest at 5.099mnMT.
The South Zone share could have improved but remained subdued due to
low capacity utilization at 57.25pc compared to 71.22pc in North Zone.
DG Khan, Maple Leaf, Lucky, Bestway, and Cherat in aggregate
contributed 66.6pc to North Zone production, while Attock Cement,
Pakland, Javedan, Dadabhoy, and Zeal Pak contributed 81.15pc to South
Zone production. It is imperative to mention the leading role of
Attock Cement in the South Zone, which contributed 25.75pc in
sustaining the South Zone share. For the first time, Attock was able
to export 41,500 tons to Qatar.
Most of the companies averaged a sales growth of
30-40pc, while Bestway and Fauji beat the industry growth with an
upside of over 50pc. Few of the under-performers included Pakland and
Saadi, which faced heavy restructuring as their ownership control was
taken over by Dewan Mushtaq Group. Profitability-wise, Bestway emerged
as the cheapest cost producer with gross profit margin of 47.43pc. On
the operating expenses front, Bestway was again triumphant with
operating profit margins of 37.29pc. However, Pioneer emerged as the
net profitability leader with a commendable net profit margin of
32.07pc. Pioneer was able to use deferred tax assets worth Rs193mn to
improve profitability this year.
Conversion to coal firing system from that based on
furnace oil helped to half operating costs by over 50pc this year,
whereas the average fuel costs per ton have improved to Rs1,000/-.
Nearly all of the companies have shifted to coal firing system with
the exception of Dadabhoy, Essa, and Gharibwal while the latter
proposes to switch to a less costly gas system by next year.
Based on the sample of 18 companies, the cement
industry employs around 8,500 persons. Workforce efficiency averages
1,300 tons per person. Out of this, Bestway, Pakland, DG Khan, Saadi,
Maple Leaf, Fauji, and Lucky proved extremely workforce efficient
A few of the companies enhanced capacities in the
outgoing year, while a great number of them have planned significant
expansions on or before the end of 2007. DG Khan and Lucky Cement
enhanced their capacities by 100,000 tonnes each in 2004.
The cement sector graduated from being a net
borrower to a net lender in 2004, after retiring Rs7,528mn in debt.
Out of this, Rs7,034mn or 93pc constituted long-term loans. Most of
the long-term loans have also been restructured or re-profiled
resulting in improved coverage at a reduced level of debt. Industry
wide financial expenses were lower by 38pc from Rs2,192mn in 2003 to
Rs1,356mn in 2004. As a result of this, the industry wide interest
coverage ratio improved from 1.80 to 7.06x in 2004. The greatest
beneficiary from debt re-profiling was again DG Khan with an estimated
interest saving of Rs.265mn followed by Fauji with an estimated
interest saving of Rs.185mn.
There was nominal growth in assets (3.55pc), which
is expected to grow manifold after upcoming capacity expansion
programs materialize. At present, Attock, Lucky, Cherat, DG Khan, and
Kohat are strongly capitalized companies. However, once civil works on
capacity enhancements commence, these companies would make heavy cash
calls to fund expansion plans. Funds will come from a mixture of
sources including internal cash from operations, fresh or
quasi-equity, and long-term debt from banks.
The industry expects a supply of 34mnMT by end of
2007 against a demand of 21mnMT at that time, thus creating an
over-supply situation much like that of the sugar industry today,
though less inelastic in nature. In view of this, the export markets
of Afghanistan have become future prospects for sustained growth and
profitability of the cement sector. Out of the expanding companies,
Lucky has proposed the highest increase in capacity yet at 5mnMT per
annum by year end 2007, out of which 2.5mnMT is expected online in
Looking ahead, Lucky will probably emerge as the
market leader after it runs more successful attempts aimed at the
cartel. Other serious contenders for market share in the short-run
also include Pioneer Cement, which is expected to enhance capacity by
1.2mnMT in 2005, second highest after Lucky at 2.5mnMT. Pioneer
expects 7.5pc market share post-capacity enhancement from 4pc
Analysts at major brokerage houses believe that the
renewed interest in cement sector would continue into 2005, where
demand is expected to touch 19mnMT, up 18pc from 16mnMT last year.
Exports are expected to jump 70pc compared to 160pc in 2004, however,
pressure on cartel will be magnified as new capacities come online. On
the profitability front, the cement sector is expected to earn 10-12pc
on the back of volume growth. Announcement for construction of dams
would add another 1.35mnMT of cement requirement each. However, in the
long-term, 2007 will be a period of over-supply at a lower estimated
utilization of 65pc and demand CAGR of 11pc. These pressures will
likely push prices below current levels and saturate the local market
causing manufacturers to hunt for opportunities outside Pakistan.