Thursday, December 16, 2010

Cement industry likely to face tough time

KARACHI: Pakistan cement industry may face tough time ahead as the exports are winding down on account of falling demand amid growing capacity expansion in the region, analysts said on Thursday.
The cement industry has gone through a hard time over the past few months as after devastating floods the industry witnessed a decline in sales during the disruptions and tepid constructional activities across the country.

In sharp contrast to market projections that had expected local cement demand to show signs of growth during the second quarter, local cement demand did not pick up during October and November, they said.

A confluence of negative factors pruned local cement dispatches by 9.0 percent to 8.3 million tonnes during the first five months of FY11 compared to the same period last year. With construction activities relatively lethargic during the winters, local cement demand may remain tepid till the end of January.

Poor local cement demand has come at a time when the cement makers are already nursing dull exports. This can be gauged from the fact that cement exports during first five months squeezed by 18 percent to 3.92 million tonnes compared to last year.

Exports are winding down on account of falling demand amid growing capacity expansion in the region. The major stumbling block is lower Freight on Board (FOB) price, hovering at $47 per tonne, against and average of $550 per tonne during the same period last year.

In such a scenario, only southern players will be able to stand competition as they pay far less freight charges as compared with their northern peers to transport cement to the sea ports.

Export prices are low enough to slowly phase out the smaller manufacturers from the export market as even the larger ones claim to only break-even at these rates.

This leaves the northern players with no option but to export through the land route to Afghanistan and India. But, exports to these two destinations are not without impediments.

Since, surplus capacity has triggered a price war among the northern manufacturers to compete for exports to Afghanistan, pushing prices down to $42 per tonne, it is highly unfavourable for the supplier to remain profitable at such a low price level.

In addition, cement exports to India are also suffering on the back of a delay in renewal of Bureau of Indian Standards certifications for some local manufacturers.

Given the scenario the growth in cement industry purely hinges on uptake in local demand. Realising the fact that economy is still in a rut, quickly the government gets the post-flood construction projects up and running. Last of all, amid escalation in commodity prices primarily coal and freight cost it seems that only those companies can post improvement in profitability that can adopt cost efficiency measures and have clear balance sheets.

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