CEMENT SECTOR

Poised to be the leader at stock market next five years

By AMANULLAH BASHAR
Dec 06 - 12, 2004

Currently, the overall capacity utilization of the 24 cement units has gone up to the highest level of 93 percent which truly indicates the remarkable performance of the cement sector in Pakistan.

In fact the performance of the cement industry on year-on-year basis was estimated at 20 percent in cement demand enabled the industry to achieve sales of 13.634 million tons during financial year 2003-04. This gives a picture that the economy has led the cement sector to grow further against a number of other industries directly or indirectly allied to construction activities. Dispatches during financial year 2003-04 moved up by 14 percent coupled with tremendous growth of 160 percent in exports.

Growing retention prices, re-profiling of debt and conversion to coal firing system, expected as greater prosperity for this sector in the years to come.

According to available figures, cement sales registered a 25 percent year on year growth to 1.14 million tons relative to 1.131 million tons during the same period last year. Local sales also registered an increase of 20 percent while exports have increased by 38 percent during the first quarter of the current financial year.

The capacity utilization rate for the first quarter of the current financial year has also increased to 93 percent as opposed to 73 percent recorded last year. In fact, constant growth in cement sales is to eventually stabilize over the medium to long-term. In view of the outstanding performance of the industry, the production capacity of the sector is likely to take a quantum jump of 28 million ton per annum by the year 2008.

There are positive signs that government's efforts towards uplifting the standard of living by providing flattering incentives to promote construction activity is likely to place the cement sector as an active player in the corporate sector.

It looks that tremendous growth in cement sector is attributable to a great extent to low rate of house financing products of the banking system which is also contributing to accelerate economic activity in diversified manners.

Besides the government focus on developing infrastructure it is also seriously working towards construction of new high dams and a huge allocation of Rs202 billion on Public Sector Development Program which altogether is likely to give new height to corporate sector especially the cement sector.

According to a survey of the cement units in the two zones i.e. Northern and Southern zones, the total sales ratio of the Northern zone to the Southern zone currently stands at 73.27 percent. Total sales in the northern region stand at 10.74 million tons, with an export contribution of 1.07 million tons and local dispatches amounting to 9.67 million tons. Exports in this region contribute 98 percent of the total industry exports due to location advantage besides low transportation cost. The local dispatches contribute to 77 percent of the total industry dispatches. The major gainer in this region was DG Khan Cement contributing to 14 percent of the total sales during financial year 2004.

The performance review on the southern zone depict sales of 2.89 million tons which include 21 percent of total industry sale with local dispatches of 2.85 million tons and exports of 30,075 tons only two per cent of the total industry exports.

In view of the above situation, cement stocks are expected to reach new heights in the current fiscal year, driven by increase in capital outlay on development projects, dams, barrages and channels.

Demand for cement is expected to grow by 25 percent this year followed by another increase of 22 percent next year. According to expert analysis, the export potential is also expected to grow its fullest till 2008. The overall export forecast will carry on till 2010-11, which indicates that the demand for cement to stabilize the sector at the stock market. Another positive aspect is the increase in capacity utilization which will give cement units an edge to export at potential markets like Mauritius, Sri Lanka, Bangladesh and the blooming state of UAE.

The incentives initiated by the present government which include available of housing loans at reduced rate of interest curtailed from previous 17-18 percent per cent to 7.5-8.5 percent, enhanced loan tenure up to 20 years and the maximum limit of lending from Rs20 million to Rs75 million.

Running parallel to the growth of the housing sector, the cement industry was also benefited due to more credit off take, as the housing loans have surged to over Rs231 billion and backed by low financing rates.

The increased capacity utilization, increased sales, enhanced exports, reduced production cost due to conversion from oil to coal and reduction in taxes and duties altogether have resulted in handsome profits to almost all the 24 cement units operating in the country. As a result of these positive signs, it is predicted that the cement sector is going to lead the rally during next 5-6 years at the stock markets of the country.