Morning Briefing for Mar 08, 2012 – Standard Capital

Karachi: Cement consumption stagnant for 4 years

Cement manufacturers are ‘kicking their ass’ since their strategic decision taken to enhance capacity in the last decade back fired.

According to Standard Capital, this aspect is particularity true for Northern Zone players that encompass nearly 80% of total country’s demand. Increased capacity created a glut like situation wherein growth in the country hampered due to multifarious reasons. Government’s fiscal constraints decimated economic activity in the country; prime minister did not uphold the promise of housing construction ostensibly due to fiscal mismanagement.

Provincial govt. in Khyber Pakhtunkhwa (KP) also remained incapable of launching any projects such as construction of many small reservoirs in their province at the aftermath of floods and hence cement manufacturers had to rely on Afghanistan demand. Cement players usually make money when local demand soars since there are little incentives available for making exports to Afghanistan where per tonnage prices (such as US$50/ton) is not good enough.

Cement consumption remained stagnant in past four years. Now the exports are also on constant decline forcing the sector to operate at 69 % installed capacity.

Cement association people (APCMA is one representative) rues that it is not possible for the industry to service its high cost loans carrying high interest rates while operating at low capacities. Some of the commercial banks are facing ignominy of non‐performing loans from cement sector which is reported at 22 % and their prospect still rising.

As per figures available, during 8MFY12, cement dispatches remained 20.5 million tons thus showing a nominal rise of 3.5% against the dispatches of 19.74 million tons in the same period last. The capacities were increased when the economy was booming and there was a lot of housing boom. Most of the capacities were increased in the northern part of the country where Afghanistan was the only export market but now even its potential is limited.

The exports to India were limited at that time and today as well due to many non‐tariff barriers by that country. Although, Lucky Cement (LUCK) continued to enjoy proximity to sea route.

Northern players are now regretting that the growth during past four years was much below par with players such as Lafarge reportedly wanted to pull out. Government has failed to provide funds for infrastructure building which has led to fierce competition among mills such as Kohat Cement, Cherat Cement, Fecto Cement, Fauji Cement etc. These companies are sitting on huge capacities that have also kept the rates of the commodity much below to average inflation in the country.

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