Cement stocks in Pakistan seeing a steep and significant fall doesn’t come as a surprise to experts following the situation. The seemingly never-ending political instability in the region, the pressing nature of the pending CPEC projects, as well as somewhat unexpected turmoil that the energy sector worldwide has recently faced, have all had a considerable impact on the price of cement.
However, as many investors and analysts predict a bleak future for the Pakistani cement industry despite the relatively promising numbers, a question has arisen whether or not their pessimism is justified. With billions of dollars annually being poured into cement, even the slightest changes in its stability can potentially cause a lot of financial damage.
Where did the pricing issues begin?
According to a report issued by Credit Suisse, recent issues in quota allocation in the North has resulted in a 3-4% price decline of Pakistan’s cement stocks. Moreover, the report cited higher energy prices and hike in excise duty as being responsible for impacting the profit margins, which have fallen off 7-10% from their peak.
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With energy remaining the single most important cost component for cement, constituting more than half of the total production cost, a surge in international coal prices negatively impacted the sector. According to Credit Suisse, cement production cost per tonne rose to US$37 in 4QFY17 from US$32 in 1Q17.
The recent 18% increase in oil prices in since June is bound to push coal prices higher in 4QFY17. CemNet has also identified China’s imposition to cut production to 276 days to reduce the supply glut as a major contributory factor to the higher coal prices. Heightened safety checks in Pakistan have also contributed to domestic coal supplies becoming increasingly tightened. CemNet’s Monday report also mentioned the recent South Africa’s National Union of Mineworkers strike as a factor in the issue. Unresolved wage disputes have staggered coal mining, and with the Union representing more than 70% of employees in the coal mining sector, the supply has been seriously affected.
Long-term outlook overwhelmingly positive
Despite several different outlets confirming that the above-mentioned issues with coal prices are bound to significantly decrease both the cement stock value and the profit margin, the general long-term outlook remains compellingly positive.
While both production and political issues have halted coal exports in Pakistan affecting its stock, domestic demand seems to be growing at an incredibly fast rate. With current reports claiming Pakistan’s cement production is working at near to 98% of its total capacity, it’s clear that domestic demand has the potential to keep the soaring prices in check.
Rapid capacity additions (26 mn mtpa/~58%) are expected to come online between FY18-20E, raising concerns of a sharp fall in cement prices among investors. Once major capacities come online in FY19/FY20 though, experts are expecting a much more positive outcome.
Credit Suisse has listed more balanced and well spread out capacity additions by producers, higher utilization levels and a better demand outlook, and stronger balance sheets as the main reasons why they expect a positive aftermath of the issue.
They cited the CPEC led investment cycle as being the factor that will enable higher utilization levels of all domestic concrete production, as well as lower efficiency gaps between producers disabling any dominant player to break the arrangement and to negotiate a better deal with buyers.
Despite recent political turmoils both in Pakistan and in the region, domestic cement demand has continued to demonstrate a robust growth – increasing 21% in 4M FY18. Long-term infrastructure projects made under CPEC continue to progress at a rapid pace, with further acceleration in infrastructure spending expected.
Next-years general elections are bound to see at least 15% of the Public Sector Development Program spending being allocated to National Highway Authority (NHA) for road networks.
Private sector increasing its spending a good sign
Rising private sector investments in the real estate sector have also seen cement demand significantly boosted, with investments grew by 45% in FY16 and 97% in FY17.
Mega real estate projects in the region such as Bahria Town Karachi and DHA City propelled construction growth to 14.6% in FY16 (highest since FY08) and 9.2% in FY17.
CPEC is also expected to have a vast impact on the private sector real estate investments. Real estate projects such as the proposed housing schemes in Gwadar add to the general notion that the outlook for private sector cement demand will ultimately end up positive.
Pakistan’s per capita consumption of concrete ( 178 kg) still remains one of the lowest in Asia and half the region’s average. The 178 kg average also remains one of the lowest in the world, being surpassed by countries such as Sri Lanka, Vietnam, and Argentina. With an accelerated pace of urbanization in the country and more than half of the population below the age of 25, Pakistan’s demand for housing is especially promising for the cement industry.