Cement margins expected to improve next quarter

KARACHI: Cement margins are expected to improve next quarter on the back of price increase and expected reduction in demand-supply gap, according to an analyst.

Cement prices are already up 14 per cent to Rs290 per bag in the last two weeks.

Performance of the sector remained subdued at local bourses, down seven per cent this year against a three per cent rise in the KSE-100 index, said Topline Securities analyst Furqan Panjani.

Cement dispatches have improved by 14 per cent to 31.6 million tons in the first 11 months of the current fiscal year on the back of sharp recovery in local demand, up 24 per cent to 21.8 million tons. Exports were also up four per cent to 9.8 million tons.

Cement dispatches are expected to reach 33.3 million tons by the end of fiscal 2010, said Panjani in his research report.

Increased Public Sector Development Programme (PSDP) allocation and new export markets discovered by cement manufacturers will help overall sales reach around 38 million tons in fiscal year 2011, up 15 per cent year-on-year, the report said.

Actual production capacity of the sector is expected to reach 46 million tons by fiscal 2011 as no major expansion is expected except for Fauji Cement’s two million tons increase in capacity.

However, effective production capacity of the sector is lower around 42 million tons because of negative margins and inability to produce at maximum level.

DG Khan Cement (DGKC) after recording losses in the last two quarters because of very low cement prices is expected to have better margins going forward, the report said.

Moreover, the company’s cost reducing measures and better dividend from MCB Bank and Nishat Mills (NML) will provide a strong support to the bottom-line, the report added.

A major chunk of the company’s portfolio comes from MCB Bank followed by NML in which DGKC has 89 per cent and seven per cent stake, respectively.

Gross margins of Lucky Cement, the largest cement exporter of the country, will reach 37 per cent in fiscal 2011 against the expected 34 per cent in 2010, the report said.

Published in The Express Tribune, June 25^th, 2010.