S.KAMAL HAYDER KAZMI,
Research Analyst, PAGE
July 2 - 8, 2012
At present, Pakistan's cement industry consists of 25 cement companies. These companies are operating with a combined 29 cement plants. Out of these, 19 plants are located in the Northern region of the country and the remaining 10 plants are situated in the Southern region. The current total installed capacity of cement industry is 47.5 million tonnes per annum (mtpa). However, adjusting for old plants and overstated capacity figures by some manufacturers, current effective capacity of the industry stands at around 41.3 mtpa. North with effective production capacity of 33.5 mtpa while the South with effective production capacity of 7.8 mtpa compete for the domestic market of around 23.3 mtpa and export market of 9.3 mtpa.
Domestic cement consumption remained nearly stagnant during the last few years, rising by just 4.5 per cent from 21.03 million tons in FY07 to 21.97 million tons in FY11, due to declining public sector development spending and moribund private sector construction activity. However, during 9MFY12 local cement demand has witnessed an increase of 8.4 per cent YoY to 17.4 million tons, primarily due to accelerating work on some medium-scale projects and a rise in residential construction.
Going forward, it is expected that the current momentum to continue at a decent but sustained pace, driven by significant housing backlog, rising government PSDP spending, construction of some midsize and large dams, and reconstruction of flood affected areas.
Pakistan is currently facing a shortage of around seven million housing units. The average occupancy rate per house is seven persons with a density of 3-4 persons per room, way above the average international standard of 1.5 persons per room. This indicates a serious housing backlog in the country.
Moreover, urban population as a percentage of total population has witnessed a growing trend. With an annual average population growth of 2.14 per cent, and per capita income likely to increase above $1,400 by FY15, it is expected that the housing requirement in the country will grow by 5-6 per cent annually.
On the other hand, at present the country's per capita cement consumption of 128 kg is much lower than that in other developing countries such as India (176 kg), Sri Lanka (470 kg), and world average of 430 kg. This suggests that the industry has plenty of long-term growth potential that is yet to be tapped. Pakistan's future economic development, likely to be led by increasing infrastructure spending, should drive up per capita cement consumption from the current low levels. Pakistan's cement consumption will reach above 200kg per capita sometime between 2020 and 2025.
DEVELOPMENT & RECONSTRUCTION
Government's PSDP spending has a direct impact on cement consumption of the country as funds in PSDP are primarily utilized for infrastructure development. PSDP had shown a strong 5-year cumulative average growth rate (CAGR) of 20 per cent from FY03-08, which led to a boom in construction activity and infrastructure development. However, PSDP expenditures witnessed a significant cut in the last few years due to higher current expenditures and fiscal constraints. But, in FY12, budgeted PSDP increased by 58 per cent YoY with emphasis on small dams and for post floods reconstruction of roads and bridges, educational and medical facilities etc. The cement industry has seen uninterrupted growth in total cement dispatches over the last decade (FY01-FY10 CAGR: 12.2 per cent) followed by a demand contraction in FY11 when volumes dropped by 8.43 per cent YoY on account of devastating floods in the country. This event had a negative impact on the performance of cement industry due to supply issues because of damaged transportation routes and halt in various private and public infrastructure development programs.
As per government's estimates, rebuilding of infrastructure due to damages will require approximately 7-8 million tons of cement, which represents 15-17 per cent of total production capacity of the industry. The rebuilding work is underway. However, due to lack of funds/donations, the completion of reconstruction may take at least five years.
During the past nine months, the cement prices have risen by a significant 23 per cent. With effective capacity utilization expected to consistently improve to 88.9 per cent by FY15 from 75.9 per cent in FY11, it is estimated that the strong pricing trend will continue in FY12 and beyond. However, for FY13, the average ex-factory cement price of Rs385/bag is five per cent below prevailing ex-factory price Rs405/bag.
Luckily, for domestic cement manufacturers, exports were strongly picked up during the last few years, driven by robust construction activity in the regional markets including Iraq, Afghanistan, UAE, and South Africa. Total volumetric exports increased at a sizeable 43.1 per cent CAGR during FY05-11.
However, it is forecasted that the export potential remains fully exploited now as evidenced by stagnant cement exports during first eight months of the current fiscal year. The exports to Middle East, Africa and other countries will decline by 32 per cent to 2.77 million tons in FY15 from 4.09 million tons in FY11 due to significant capacity additions in the region, slowdown in construction activities in UAE, and massive excess capacity of 300 mtpa in China.
Afghanistan, a primary cement market, accounts for around 40 per cent of the country's total exports. For India, there was a 10.7 per cent CAGR during the same period in view of warming trade relations between the two nations and expected removal of nontariff barriers (NTBs) on Pakistani cement exports would boost up cement exports to India by 39 per cent YoY. However, due to low quantum, cement exports to India would hardly comprise 10 per cent of total exports in FY15. It is also estimated that the overall cement exports at 9.3 million tons in FY12 is lower by 1.1 per cent from 9.4 million tons in FY11.