DG Khan Cement - the third largest cement manufacturer in Pakistan - has entered into an agreement with Danish cement plant manufacturer, FLSmidth, for the supply of a plant that will have a capacity of 8,500 tons per day or 2.5 million tons per annum.
According to the company notice, it will be setting up the plant in Hub, Balochistan’s industrial city, about 30km northwest of Karachi. The cost of the plant is about Rs6.5 billion or $65 million.
“This is not only a positive development for the company but also for the cement industry of Pakistan,” BMA capital analyst Sajjad Hussain commented.
The news of the company’s expansion plan has been drawing attention for quite some time now for it will rebalance the dynamics of the cement industry, which is coping up with the excess installed capacity in the country.
“It is imperative to note how cement demand in private as well as in public sector has expanded in the recent months,” Hussain said. “Looking at the present market conditions, one can say that cement demand will remain high due to construction activities in both private and public sectors.”
The total installed capacity of Pakistan’s cement industry is 45.6 million tons, but despite touching its highest-ever sales of 34.2 million tons in fiscal year 2015, the industry has a huge surplus capacity of 10.2 million tons.
Analysts believe the latest expansion plans of DG Khan will not lead to any price wars among the top cement players, at least in the short term, because this plant will be operational in the next three years - a time when China-Pakistan Economic Corridor (CPEC) will be generating enough additional cement demand in the country. Before the announcement of CPEC, the cement industry was more fearful of a price war among cement players to grab more market share.
The latest development in DG Khan’s move into the south is expected to create some turbulence for the sector especially in the southern region of the country, but the threats of price war is being blown out of proportion, AKD Research commented on Monday.
The threat of price war or price undercutting is low because the leading cement companies are operating at high utilisation levels, and are now positioning themselves to take advantage of the government’s public policy tilt towards development programmes and incremental cement demand emanating from CPEC, the report added.
Following the contract with FLSmidth, DG Khan’s share price rallied on Karachi Stock Exchange (KSE) and was among the top performers in the sector on Monday, JS Research report said. Moreover, in anticipation of higher than predicted cement dispatches and continuously rising local demand, the entire cement sector remained upbeat.
With cement production capacity of 4.3 million tons per annum, DG Khan has been operating at an average capacity utilisation level of about 98% for the past seven years. It has been actively pursuing expansion since September 2013, when it first unveiled its intention of undergoing expansion in the southern region of the country.
DG Khan would be able to meet demand from projects earmarked under CPEC and activities related to the Gwadar Port while at the same time it would allow the company to leverage the export market.
Almost all of the cement companies in Pakistan are investing in different forms to cater to the growing cement demand under CPEC, which may attract funds allocation of up to $44 billion in transport infrastructure and energy-related projects over the next 15 years.
Published in The Express Tribune, July 14th, 2015.
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