Uplift spending cut likely to suppress cement demand in FY2019

KARACHI: Cement demand is likely to fall during the current fiscal year as structural challenges and decline in development spending would take toll on the commodity’s local consumption that witnessed a double-digit growth in the last fiscal year, a brokerage reported on Monday.

Cement local sales posted an extraordinary growth of 15.4 percent in FY2018 owing to ‘heavy visible’ spending in the wake of general elections in middle of this year. “The demand is bound to slow down in FY2019 partially due to a high base-effect and mainly due to structural challenges the Pakistani economy is currently facing,” analyst Faraz Abbas at Taurus Securities said.

“We forecast the cement sector to remain under pressure wherein a cut down in the federal PSDP (public sector development program) spending in a general contractionary macro environment is bound to take its toll on the domestic dispatches, which are expected to post a negative growth of two percent in FY2019 on account of 5 percent decline in the northern region demand.”

Even though capacity utilisation of the cement industry clocked in at 93 percent with the highest ever incremental dispatches in number terms, FY2018 proved to be a difficult year for the cement sector wherein gross margins contracted to 31 percent mainly on account of high cost of production.

In the last 25 years, cement local demand grew at a compound annual growth rate (CAGR) of 6.6 percent. The growth appeared more pronounced in the recent years as the focus of the federal government on infrastructure and development spending along with the China Pakistan Economic Corridor-led demand made local demand grow at a five-year CAGR of 10.4 percent.

“However, this time around the picture appears less rosy for the industry,” Abbas said. “With inflation bound to increase sharply once the lagged impact of the rupee devaluation is felt, discount rate reaching the highest level since January 2015 and cut in the federal government public sector developmental spending budget, we forecast local demand to post a negative growth.”

Demand is, however, expected to improve on the Prime Minister s flagship housing scheme, “though we remain skeptical with respect to the total houses promised to be built”. “The recent buzz relating to the PM s housing project, improved export outlook (southern players) and a general discipline relating pricing as depicted by healthy retail prices until now,” Abbas said. “However, we believe the expected commencement of CHCC s (Cherat Cement) Line III in December 2018 may cause the prices to break down in the northern region as CHCC has a history of fighting for market share albeit offering lower prices and discounts.”

The brokerage expected 2.2 million tons increase in exports from southern mills, which have proximity to the sea waters, with a collective addition of 5.4 million tons capacity in the region by Lucky Cement Company, Attock Cement and DG Khan Cement in FY2018. “We consider Bangladesh and African countries such as Senegal, Madagascar and Mozambique to be important exporting destinations for Pakistan,” it said.