CEMENTING THE CONSTRUCTION INDUSTRY
Pakistan's entry into global markets can help in improving quality of cement
SHABBIR H. KAZMI
Nov 12 - 18, 2007
Availability and price of cement play the most vital role in keeping construction industry vibrant in any country. Cement cost was not crucial for houses being built using clay bricks in a country like Pakistan. However, with the change in the construction standards, cement price is becoming very crucial, particularly for high rise being constructed in Karachi.
Lately, there seems to be paradigm shift in living habits of the residents of urban areas. With price of land sky rocketing builders and developers have to exercise various options. Within the main city skyscrapers are being built but cost is also becoming unbearable for the largest segment of the population. The cost of infrastructure projects is also being affected.
The problems of construction industry are further aggravated because of rising cost of steel, must in the construction of high rise buildings. Unfortunately, Pakistan is deficient in steel production. Ship breaking sector was feeding the demand of re-rolling mills. However, lately the activities at Gadani have shrunk to an alarming level and import of steel billets has gone up substantially. On top of this rising energy cost and growing steel import of China are responsible for the hike in steel cost.
According to reports the ship breaking Bangladesh faces lull, which has resulted in decline in price. This should bode well for Pakistan. However, the only concern is political uncertainty in the country, which may keep construction activities subdued to some extent.
In order to understand future trend of cement prices it is necessary to look at the offtake figures. During July-September 2007 total dispatches were about 7.29 million tons compared to 5.42 million tons for the corresponding period of 2006, depicting an increase of 35%YoY basis.
Local sales were up by 21%YoY to 5.74 million tons compared to 4.76 million tons during the corresponding period last year. A against this exports grew by 135%YoY to 1.55 million tons. Out of this one million tons were exported from the northern region with Afghanistan being the biggest buyer. The remaining quantity was exported by the mills located in the southern region, with Middle East emerging the major market.
The share of exports as a percentage of total sales increased from 13% to 27%. Considering that exports to India have kicked off plus the fact that demand in Afghanistan and Middle East remains robust, Pakistani cement manufacturers are ideally placed to cash in on this opportunity.
During July-September 2006 the average retention prices were approximately Rs 3,347/ton, which declined by 21%YoY to Rs 2,633/ ton in July-September 2007. Companies in the southern region were able to retain better prices due to the supply glut in the northern region. The drop in retention prices was the reason for topline decline despite growth in volumes.
Another blow to margins was the substantial increase in coal prices. Coal constitutes approximately 65% of the total cost of sales and with cost of coal for cement companies increasing from $72/ ton to $95/ton, cost of production surged by 29%YoY in July-September 2007.
Another expense that companies have had to face was the rise in distribution cost as robust growth in volumes, both domestically as well as on the export front, has forced companies to strengthen their distribution network. This resulted in operating expenses to increase by 143%YoY during the quarter under review.
With the industry still in the expansion phase, coupled with the fact that interest rates continue to be high, financial charges went by nearly 50%YoY increase for the highly leveraged sector, dampening profitability.
It is believed that prices have hit rock bottom and a possible price agreement is on the cards which should help improve margins going forward. Healthy cement demand in export markets should further help in pushing margins upwards as retention prices in the export markets have been higher as compared to the local market.
Pakistani manufacturers have already started exporting cement to India and with queries coming from places like South Africa, demand potential cannot be underestimated. This phenomenal demand on the export front should help the manufacturers retain or improve the existing output prices for the rest of the year.
Cement offtake is usually subdued during winter particularly in the northern areas that accounts for approximately 80% of the total market. With excess supply the market may witness some pressure on prices. However, the export story still remains strong. While exports were not as high as originally expected, this is largely due to logistical and administrative issues. Once these are resolved exports should pick up. Exports have already begun through rail and addition of land route will further boost the exports.
Though, cement manufacturers are gradually switching over from use of furnace oil to coal the real objective of cost saving could not be realized. Despite the fact that Pakistan has trillions of tons of coal reserves, cement manufacturers are grossly dependent on imported coal. The country enjoys availability of basic raw material. However, cement prices could not be brought down due to higher incidence of taxes.
It is heartening that local entrepreneurs are expanding the installed capacity as well as establishing new plants. Entry of foreign investors is expected to not only help in creating new production facilities but also introduce state-of-the-art technology.
It has be iterated repeatedly that if Pakistan has to attain a prominent place among the cement exporting countries, a dedicated bulk cement loading jetty has to be constructed at Karachi or Gwadar seaport.