Seasonal trends matter. Last month’s dispatch numbers for the cement sector between August and September reflected a month-on-month decline of 16 percent in local dispatches and 15 percent drop in exports, but October has confidently changed the tides toward upward mobility once again. In month-on-month growth, local dispatches have grown by 18.6 percent and overall dispatches have grown by 15.3 percent, clocking at 12.5 million tons in 4MFY17 against 11.4 million tons in 4MFY16. (Read about first quarter’s dispatch numbers “Cement: Riding the tide” published on Oct 24, 2016).  

Dispatches in the north grew by 10 percent while the southern block saw a 16.5 percent growth in dispatches between 4MFY17 and 4MFY16. Similar pattern of growth is seen in month on month growth with both local regions have bounced back in October.

Exports have interestingly grown by 1.7 percent at 2 million tons in 4MFY17 despite a continued slowdown in the Afghanistan market due to cheap Iranian cement that is reaching that market faster than Pakistani cement since the time sanctions were lifted. Iran is the fourth largest manufacturer of cement with a production capacity of 70 million tons, against Pakistan’s existing capacity of 45 million tons. Not only do Iranian firms face overcapacity, significantly lower cost of production has dropped prices. Iran has been dumping excess cement across the region. In fact, Iraq banned Iranian cement for a while. Some of this cement is also being smuggled into Pakistan and sold in Balochistan.

Afghanistan market is not the most viable export destination for Pakistan anymore, and other routes ought to be explored.

We highlighted last time that Pakistani exports to the Indian market might not continue to grow as India and Pakistan relations become more aggressive and tensions ensue. Trade almost always get the brunt of political skirmishes. Meanwhile, nationalists’ voices in India have urged halting all relations and exchanges between Indo-Pak, while traders on both sides have shown solidarity by cutting off ties at least temporarily. Cotton trade has already hit the floor, which is worth a little under $1 billion annually. Activity at the Wagah Attari border for perishable goods trade was heard to have halted.

Consequently, cement exports to India fell by 14 percent between August and September and further by 1.1 percent in October. Even so, in year on year growth, total exports to India in 4MFY17 nearly doubled, which shows the great potential of this market, despite pointing toward upcoming volatility.

Sea route exports have also fallen by 12 percent in year-on-year growth, and a large share that used to go to South Africa is still under the imposed anti-dumping duty.

The growth in local cement demand is expected to be 12-15 percent annually as construction projects are launched, and this column has talked about the 22-million-ton expansion that the industry will see in the upcoming 5 years, which will most likely be absorbed by demand completely. This means, there is space for new players, though persistent barriers to entry such as mining licenses and land acquisition pose as challenges.

Anhui Conch is one Chinese cement player that has shown interest in the sick unit of Dewan cement with an installed capacity of 2.9 million tons and margins ranging from 14 to 17 percent that are several levels below the industry peak margins of 48 percent in outgoing fiscal.

Local players believe that the arrival of this new investor may disrupt the industry’s dynamics and even potentially bring a price competition in play. But it is unlikely that this new player would adversely affect local players immediately since demand and economic growth is on the side of these highly competitive firms running on an average margin of 42-45 percent.

This is also the reason firms were racing toward expansion—to ensure that market demand is met by existing players alone. As expansions come through, according to our simplified estimations, utilisation would not go down below 75 percent. Historical trends show that prices dropped in 2009 when utilisation declined to 74 percent, which does not seem like it would happen.

Right now, imported cement even from China is significantly expensive due to import duties, and can be only competitive with local cement if these duties are removed. There is precedence as to why local cement manufacturers fear competition but they are operating at sky-high margins, and some price competition from imports and new players entering the market may keep them on their toes while giving competitive prices for the consumers. Is that too bad?

During the four months of this fiscal, local dispatches in FY17 have grown by 14 percent in 2MFY17, 9.5 percent in Q1FY17, and 11.3 percent in 4MFY17 year-on-year. Future dispatches will be dictated by local demand, and despite some month-on-month shake-ups, these growth rates draw a positive trajectory.

Cement players here at home should not fear competition. In any case, the likelihood of any new player making a huge dent in the industry is unrealistic given how long it takes and how costly it is to set up a greenfield investment or revitalize an uncompetitive unit.

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Cement Dispatches 4MFY17 (tons)


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                    4MFY17       4MFY16       YoY       Oct-16       Sep-16      MoM


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North- Local     8,612,621    7,814,974     10.2%    2,488,810    2,112,870    17.8%


South- Local     1,826,490    1,567,406     16.5%      519,333      423,280    22.7%


All Local       10,439,111    9,382,380     11.3%    3,008,143    2,536,150    18.6%


Afghanistan        767,671      869,824    -11.7%      192,936      227,807   -15.3%


India              490,078      242,755    101.9%      110,314      111,534    -1.1%


Sea route          805,812      915,888    -12.0%      215,164      183,438    17.3%


All exports      2,063,561    2,028,467      1.7%      518,414      522,779    -0.8%


All dispatches  12,502,672   11,410,847      9.6%    3,526,557    3,058,929    15.3%


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