DECLINING CEMENT LOCAL DEMANDS

ALTHOUGH LOCAL SALE IS ON THE DOWN LINE EXPORTS ARE RISING

SHABBIR H.KAZMI
Dec 29 - Jan 04, 2009

The biggest concern for the cement sector over the last 12 months was high coal and furnace oil prices. Since touching respective highs earlier this fiscal year, both are down about 60% but cement prices do not seem to be following the trend. Domestic cement prices have mostly remained unchanged due to manufacturers’ ability to reach a consensus pricing agreement. FY09 gross margins are expected to improve by 11-12% YoY and may prove exceptionally good year for some of the manufacturers.
Analysts cut domestic demand estimates for next couple of years sharply. With emerging weak demand and oversupply, sustaining high cement prices may not be possible.
Domestic cement demand is down 15% YTD FY09 and likely to remain sluggish due to 1) cut in government development expenditure over the next couple of years mainly due to IMF’s pressure to cut down development expenditures; 2) inflationary pressure still on and 3) slowdown in GDP growth momentum. Analysts do not see a near term recovery. In fact now they expect domestic cement demand to shrink by 17% in FY09 and grow by only 1% in FY10. So far exports have shown no sign of stress. While analysts maintain that growth should taper off in 2HFY09, they upgrade export forecast to about 10 million tons in FY09 but cap it at 7.5 million tons in FY10. They expect clinker exports to contribute to more than 70% of the expected higher export number.

LUCRATIVE EXPORTS

According to the data released by All Pakistan Cement Manufacturers' Association (APCMA) overall dispatches during 5MFY09 were recorded at 12.4 million tons, translating into a growth of 3.52%YoY. Local dispatches were recorded at 7.9 million tons in 5MFY09 compared to 9.4 million tons during the corresponding period last year, translating into a decline of about 16%YoY.
Export dispatches have witnessed a strong growth of over 76%YoY to reach 4.5 million tons during the period under review. The contribution of export dispatches to overall sales stood above 36% in 5MFY09 compared to 21% during the same period last year.
Overall cement dispatches during November '08 were 2.57 million tons compared to 2.51 million tons in October '08, an increase of 2.43% MoM. Local dispatches marked an improvement, increasing by 6.7%MoM to 1.6 million tons. However, on a YoY basis dispatches were lower by 19% in the month of November.
Export dispatches witnessed a strong growth but keeping in view the recessionary pressures in the global economy, analysts view the growth trajectory as unsustainable and expect export growth to slow down in the latter part of FY09. The data released by APCMA shows total export of about 965,000 tons during November 2008 was comparatively lower than October’s one million tons figure. During November cement dispatches to India touched 67,534 tons which was comparatively higher than that of October at 37,567 tons.
One of the reasons for increase of cement export to India was existing contracts with Pakistan and shut down of one of India’s major manufacturing plant for couple of weeks. On top of this, 275,410 tons cement was exported to Afghanistan, 506,555 tons to UAE and Sri Lanka along with 115,387 tons clinker.
Local dispatches are bearing the brunt of domestic economic slowdown coupled with liquidity issues and relatively high retail prices. A cut in government spending on development projects is likely to further aggravate the situation. On the export front, the main downside risks to the sector are 1) global financial crisis, 2) commissioning of regional capacities and 3) domestic inflationary pressures.
Capacity utilization fell to 49% as the demand surge fails to match the levels of incremental rated capacity. Lucky Cement emerged the market leader, with a share of 18% followed by D. G. Khan Cement (13%). Lucky also had the largest share (27%) in export followed by Maple Leaf (13%) and DGKC (12%). The top 5 cement companies namely Bestway, Lucky, DGKC, Maple Leaf and Pakistan Cement cumulatively accounted for almost 60% share of the market.
Coal price, which contribute a major portion of the cost of manufacturing of cement, have come off sharply since touching the peak of US$174 per ton (FOB South African coal) are currently at US$73 per ton. As a consequence, cement prices have also come off and currently stand at Rs365-375 per bag, declining by10% from their peak of Rs400 per bag. Given the magnitude of the decline in coal prices cement prices have to be reduced further going forward.
Majority of the Pakistan cement makers which buy imported South African, Indonesian and Chinese coal are still honoring all contracts despite the recent price fall, but exporters are not facing any sort of problems from Pakistani importers because they are not re-negotiating the existing contracts but seeking for new and cheaper contracts. Pakistan’s average imports of coal from South Africa are close to 3 million tons per annum.
However, due to country’s current scenario import of coal is on the decline and demand is not likely to increase, rather expected to stagnate around 3 million tons in FY09.
Over the last 8 months economy has remained under severe pressure which has affected the cement sector. Due to double digit inflation rate construction and manufacturing activities are experiencing downward trend. Cost of production is likely to decline due to decrease in coal prices but financial cost is on the rise due to hike in interest rates. However, export business remains lucrative.