Nov 24 - 30, 2008

Cement industry has been bearing the brunt of economic turndown, inflationary pressure and liquidity crunch. Recently release of the industry data by APCMA showed a gloomy demand scenario. Overall cement dispatches during Jul-Octí08 increased from 9.5 million tons to 9.8 million tons showing a tepid rise of 4% as against 34% growth registered in the same period last year.

Local demand of cement during Jul-Octí08 witnessed a drastic fall of 15% to stand 6.337 million tons as compared to 7.456 million tons with a stunting growth of 19% in the same period last year, the cement industry which have been growing remarkably since 2001-02 and growth has reached as high as 24% in 2006-07, has succumbed to prevalent economic imbalances consequently fast depleting foreign exchange, globally inflationary pressure due to unprecedented hike in oil/food prices lowering purchasing power, social unrest in NWFP hampering demand, soaring construction cost, political instability etc.

Export maintains its rising tempo despite severe global financial and economic crises, the export during Jul-Octí08, has augmented from 2.03 million tons to 3.5 million tons showing a whopping growth of 73% over the same period last year on account of the increased demand on back of the ongoing construction activities in Middle East and India leaving dearth of cement in the backdrop of supply constraints in the region.

. Tons/Mil Tons/Mil Tons/Mil
Local Demand/Export: 6.337 7.456 6.271
Cement 2.937 0.560 1.931
Clinker 0.095 0.784 -
Total Export 3.497 2.026 0.784
Total Despatches 9.834 9.482 7.055
Growth in local demand -15% 19.% 15%
Growth in Export 73% 158% 41%
Overall Growth 4% 34% 17%
Industry Capacity m/tons 38.64 36.09 27.97
Capacity Utilization-Domestic 49% 62% 68%
Capacity Utilization-Export 27 17% 8%
Overall Capacity Utilization 76% 79% 76%
Source: APCMA

Export has contributed a bigger share of 36% towards overall dispatches as against 21% in the corresponding period last year. It has also absorbed 27% its idle capacity in contrast to 17% absorbed during the similar period last year. exports have so far provided vital support to the overall capacity utilization to achieve 76%. However, rising dependence on export may escalate external threats which may prove to be fatal when green field projects/expansions with huge capacity from Iran will come up in 2009, India and China will have surplus due to slowdown in the economy.

Industry Capacity has risen by 29% to 36 million ton in Jul-Octí07 from 28 million tons in Jul-Octí06 and also increased by 7% to 38.6 million tons in Jul-Octí08.The capacity utilization in case of local demand worked out to 49% in Jul-Octí08 as compared to 63% achieved during Jul-Octí07 registering a significant fall of 22%. Despite that the gap has, to a great extent, been filled by export, yet there is a cause of concern when new capacities (Garibwal 2.1 m/tons and Kohat 2.1 m/tons) will be coming up within a couple of months taking industry capacity to 42.8 million tons. It will further worsen the situation and may reduce the capacity utilization to 45%.

Prices of cement in Jul-Octí08 have shown a healthy growth over 95% outpacing 55%-60% increase in inputs prices as against the same period of last year, hence supporting topline and bottomline and easing out pressure on liquidity of the industry, despite the fact that coal prices in international market which touched at its highest of USD 195/ton in Jul-08 have brought down to USD 110/ton, 44% down, in the sympathy of oil price which peaked at USD 147/barrel in Jul-08, nosedived on the fear of worldwide recession. Decrease in coal price would have positive impact on the industry. Such impact is yet to be measured in wake of depreciation of Pak Rupee by 20% since Jun-08, rise in interest rate, and recently increase in electricity tariff will further batter already depressed profitability of the industry. SBP has recently hiked interest rate by 200bps in the policy rate fulfilling one of conditions set by IMF which will put severe dent on the sector's profitability. After coming up of new capacities, the industry will have to pass through a real test, it may put the tremendous pressures on prices of cement ultimately triggering price war, thus further eroding profitability of the sector.

Strong export prices with the increased volume by 73% have been providing continuously support to bottomline, export prices have significantly gone up by more than 55% over the same period last year on the back of the rising demand from Middle East due to booming construction activities. Growing global financial and economic crises may take its toll and booming in construction may burst due to worldwide recession, demand of cement from abroad may mark a soft end to the boom. Due to worldwide slowdown in oil consumption and tumbling of oil prices in international market, Oil producing gulf countries which have forecasted their mega projects based on US$100/barrel could be compelled to retrench their expenditure, retrenchment of investments in real estate business may hurt export and make cement surplus in the region.