Attock Cement adds new production line

Expands idle capacity at a time when construction activities remain subdued on elevated inflation, interest rates

KARACHI:

Attock Cement announced on Tuesday the addition of a new production line with an installed capacity of 1.27 million tonnes per annum, expanding the country’s idle capacity at a time when construction activities have remained slow amid elevated inflation and record-high interest rates.

The output capacity of the manufacturer of the Falcon brand has risen to a cumulative 4.30 million tonnes per year, placing it among the top 10 producers (in terms of capacity) out of the 26 major manufacturers of construction material in the country. With this addition, the country’s total cement production capacity has risen to around 85 million tonnes per year, with almost half of the total capacity currently lying in surplus, putting many companies in a tough financial situation.

Speaking to The Express Tribune, Mehroz Khan, Deputy Head of Research at Foundation Securities said that cement manufacturers have added around 12 million tonnes of new capacity under the fourth expansion cycle since November 2022. Several companies announced expansions at their factories following the Covid-19 pandemic based on a positive economic outlook, fuelled by remarkable growth and an amnesty scheme in the real estate and property sector.

However, the situation quickly turned unfavourable against the previous outlook amid economic challenges exacerbated by domestic political tensions and worsening geopolitics in Europe and the Middle East. This led to a significant economic downturn, with inflation reaching a multi-decade high of 38% in May 2023 in Pakistan and interest rates soaring to a record high of 22% in June 2023, severely impacting construction and economic activities in the country.

In a notification to the Pakistan Stock Exchange (PSX), the cement maker reported the successful completion of construction and installation work for the additional line, producing 1.27 million tonnes of cement per annum at its manufacturing site in Hub, Baluchistan. “The new line is now operational, and production has commenced with effect from April 16, 2024.”

Although the addition of idle capacity could have triggered a price war among cement manufacturers, this is not the case at present. The company installed the new production line at an initially estimated cost of Rs15 billion, including a significant portion of debt acquired from banks.

Khan explained that the high-interest rates do not allow manufacturers to initiate a price war, as they are repaying the debt portion at prevailing high interest rates. However, the surplus production capacity may enable manufacturers to increase exports when global demand rises.

Cement sales reached 34.50 million tonnes in the first nine months (Jul-Mar) of the current fiscal year 2023-24, a 2.7% increase compared to 33.60 million tonnes in the same period of the previous year.

In its half-yearly report for the period ended December 31, 2023, Attock Cement reported in February 2024 that the fiscal year 2023-24 started promisingly, but local sales were affected during the second quarter due to unstable economic and political conditions. Local sales declined by 12% in the second quarter compared to the same quarter of the previous year.

“The growth of the cement sector largely depends on interest rates. If the central bank continues its tight monetary policy, investment in the local real estate sector will remain subdued, and the desired levels of volumetric growth in cement dispatches may not be achieved,” it said, commenting on the outlook.

It appears that political uncertainty will persist for the time being, continuing to impact markets and the investment climate, at least in the medium term. The country’s economic stability depends on securing a new International Monetary Fund (IMF) programme as the current standby programme will expire in March 2024, it added.

Published in The Express Tribune, April 17^th, 2024.

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