According to BMA, the cement industry will likely add 8.9 million tons to its existing capacity of 45 million tons by the end of fiscal year 2017. PHOTO: FILE
“The expansion plan unveiled by DG Khan Cement confirms the rift between members of the All Pakistan Cement Manufacturers Association and this may spark a price war among them,” said JS Global Capital analyst Atif Zafar while talking to The Express Tribune.
DG Khan Cement, a leading manufacturer, announced on Wednesday that it would start its 2.6 million tons per annum plant in Hub, Balochistan (southern region) and abandon the plan to invest in a cement plant in Mozambique. This is significant as DG Khan and existing strong players in the southern region – Lucky Cement and Attock Cement – will scramble to increase their market share.
Owing to the uncertainty, the cement sector has been under pressure in the Karachi stock market for the past few sessions, analysts say.
“Though the KSE 100-share index surged 576 points or 2.63% at the end of trading on Thursday because of overall positive sentiments which also supported cement companies, but investor concerns about the cement industry were very much there and have not diminished,” Zafar said.
In a report prepared on Thursday, BMA Capital Management said the capacity expansion plans of Cherat Cement and DG Khan Cement suggested that all was not well among members of the cement manufacturers association.
“While we maintain our projections of a healthy demand growth in the next five years (6%-8% per annum), we would highlight that every player competing for a greater share of this expanding pie may create fissures within APCMA for the time being,” the report said.
According to BMA, the cement industry will likely add 8.9 million tons to its existing capacity of 45 million tons by the end of fiscal year 2017.
Cement stocks have continued their downward journey and have lost 16% of their value since the end of July, underperforming the broader KSE index by 10%.
In the wake of fresh capacity expansion plans, Lucky Cement may also follow suit to consolidate its position as industry leader. Smaller players running close to 100% capacity and generating healthy cash (Attock Cement for instance) may also enter the fray to ensure their market share in the future.
Pressure on the cement sector, witnessed recently, may continue in coming weeks as well, the report said. This selling pressure will be driven by speculation concerning right share issues and heavy balance sheet leveraging to fund capital expenditures of Rs9 to Rs12 billion required for every million tons of annual capacity.
BMA saw an annual growth of 7% in local demand, leaving a surplus of 12 million tons in the financial year 2017. This suggests capacity utilisation at 78% in FY17, still higher than the current 75%.
However, BMA was bullish on the cement sector until fiscal year 2016. The threat of supply glut and price war will not come true before FY16 when these capacities will actually come online. Even then, projections suggest that supply glut (12 million tons) will not be worse than the peak seen in FY12.
Funding the expansions would require a healthy cash generation and maintaining high margins is necessary for the industry in the medium to long term. Thus, APCMA members will likely reach an agreement soon and cement prices will maintain upward movement, according to BMA.
Published in The Express Tribune, September 6th, 2013.
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