Pakistan Cement Sector News and Discussion

[ejaz007]

Gharibwal sliding in losses
By BR Research on February 25, 2020

(PSX: GWCL) is a smaller cement manufacturer; and much like other small and big players in the arena (Cherat and DG Khan Cement for instance) incurred a loss in the first half of the fiscal year. Domestic demand is down, retention prices are more competitive, and costs are up.

Gharibwal's factory is located in Punjab near the Jhelum river and supplies mainly to markets in the north of the country. This is where competition has grown as more companies have expanded capacity and demand has remained lethargic. Bigger companies have had a better chance at growing their market share then smaller companies.

As a result, prices fetched by cement in the domestic market have been under pressure. Previously, Gharibwal was also exporting to India, but since countervailing duties hit Pakistani cement, that market has also closed doors.

However, the company was never truly export-dependent. In FY18 and FY19, its revenues from exports were less than 1 percent (<2 percent during FY17 and FY16). Since it is operating on a smaller capacity, it supplies mostly domestically and has to deal with the concentration risk associated to it.

Though coal prices in the foreign markets have been heading south (average coal price were down 32 percent during the Jul-Dec 2019 period against the corresponding period last year) — which cement companies should have leveraged by managing inventory effectively and procuring fuel accordingly —Gharibwal's margins have fallen to 10 percent (from 25 percent last year).

Low prices are certainly a factor. In the first quarter, revenue per ton sold came down 14 percent. Cost of goods sold per ton meanwhile rose 11 percent. Electricity prices and increase in royalty on the raw material — limestone and clay — (up 160 percent) were also dominant factors.

The company was unable to keep overheads in check. These stood at 12 percent of revenues in 1HFY20, against only 5 percent which is typically an average for cement companies. Higher distribution costs points toward higher transportation costs. Tighter monetary policy has also resulted in higher financial costs for working capital needs, rising from 4 percent to 7 percent of the revenues. The company is spending a lot more than it is bringing in.

Prices in the north market will remain under pressure as new capacities come online and demand remains subdued. This is not a good time for cement firms, particularly the smaller ones.

https://www.brecorder.com/2020/02/25/574554/gharibwal-sliding-in-losses/

 

[ejaz007]

MapleLeaf in a rocking boat
By BR Research on February 27, 2020

A 30 percent growth in revenues should translate into a profit but not for MapleLeaf Cement (PSX: MLCF) and not under its current circumstances. Lower retention prices, and higher costs have created a challenging dynamic for most cement manufacturers, many sliding into losses. Mapleleaf is no different.

Rising industry capacity together with reduced demand in the market has pushed companies to compete on prices, racing to sell off excess cement. This is especially true for companies in the north zone of the country where capacities have increased substantially. Meanwhile, reduced development expenditure and spending in the private sector has shrunk demand. Companies with higher capacity have managed to grow market share but margins have ultimately suffered.

In the first quarter, volumetric sales grew nearly 72 percent, but revenue per ton fell 26 percent. Mapleleaf's new capacity has allowed the growth in volumes but revenues could not grow as much as it could have at last year's prices.

Coal prices internationally have rallied downward due to reduced global demand, particularly that coming from China. Average coal prices in the Jul-Dec19 period fell 32 percent against the corresponding period last year. Despite that, the company incurred higher costs associated to gas, power and transportation which helped slide margins to less than 4 percent from 27 percent in 1HFY20. At this rate, bottomline turning red was inevitable.

One major expenditure is also financial costs which went up to a whopping 10 percent of revenue against 6 percent last year. This is not only due to expansion related borrowing but higher cost of borrowing on account of tighter monetary policy.

Reduced indirect expenses as a share of revenue – down from 7 percent to 6 percent could not cushion the blow that lower price retention and higher cost of production together brought to profitability.

A major recovery in demand and an improvement in prices would help shore up the topline in relation to costs. This may come if the Naya Pakistan Housing Projects kick off soon and construction activities revive. By the looks of it, this is not happening nearly soon enough.

https://www.brecorder.com/2020/02/27/575233/mapleleaf-in-a-rocking-boat/

 

[ejaz007]

Cement: Is industry in crisis?
By BR Research on March 4, 2020

Demand slowdown, low price retention, high cost inflation. The cement industry is putting out fires in several departments but has not been entirely successful given the circumstances. Profitability has plummeted for all cement firms (against an already low base), most if not all sliding into losses, barely turning a profit in the first half of this ongoing fiscal year. Cumulatively, the industry has incurred a loss in 1HFY20 (for the 14 companies evaluated for this analysis). All signs are blaring red.

Let's look at demand. For one, the industry has expanded capacity considerably—adding about 10 million tons in only the past several months. This has in turn raised the urgency for firms to sell off more cement, in a market that has simmered down. Domestic demand has been increasingly lethargic (due to lower government and private sector spending on development and construction), particularly in the south zone where demand typically always remains behind northern markets. The industry registered a 6 percent growth in sales during 1HFY20 (domestic: 3%, exports: 23%) evidently, brought forth by exports.

Exports have also taken a different turn. Cement companies located near the port have been exporting more clinker, than cement to markets overseas. Clinker was 46 percent of all exports going out of cement factories overseas and cross-border in 1HFY20. The classic example is Attock Cement which is the only company other than Lucky that has registered a substantial profit margin in 1HFY20. The company's clinker exports rose 51 percent during the period while cement exports grew 23 percent. A whopping 60 percent of its sales are now coming from exports. Good for Attock, though other smaller cement companies located near the port have not been as aggressive in reaching markets overseas. Meanwhile, firms located farther away from the port have also been at a clear disadvantage.

Exports share in total dispatches for many cement companies in the north has fallen as markets like India have become entirely inaccessible due to the recently imposed countervailing duty on Pakistani goods. Zero exports to India meant that the 46 percent growth in exports to Afghanistan only just made up for the loss in that market next door.

Demand has been a mixed bag, and though exports have come to the rescue (they were 18% of total dispatches in 1HFY20, against 15% the corresponding period last year), it is clear that the industry depends heavily on domestic markets where it is able to earn better margins and keep tighter controls on overheads. However, what really put a dampener on the combined toplines of cement firms were the retention prices they fetched both domestically and abroad. Except for 2 companies, revenue per ton for the entire industry is down, and by a considerable difference. More on that in a later analysis.

https://www.brecorder.com/2020/03/04/576924/cement-is-industry-in-crisis/

 

[ejaz007]

Cement’s brave face on!
By BR Research on May 7, 2020

Whether it is cement's substantially reduced domestic demand, falling retention prices or cost inflation—cement manufacturers not unlike other businesses have had a rude awakening. This jolt however came long before COVID-19 pandemic hit the world. Looking at their current financials, it makes sense why companies would leap to re-establish a cartel-like arrangement (read more: “Of cartels, competition and consumers", April 26, 2020) and raise prices when expectations of demand goes up and prices could be raised to the level they were at last year. The three major factors have led to a cumulative decline in profits of Rs31 billion in 9MFY19 into losses of nearly Rs5 billion.

Net profits across the cement industry were already signaling red in the six month period. In fact, several smaller companies were in gross losses as cost pressures rose and demand was not keeping up. As economy was shrinking, many construction and infrastructure projects were stalling and demand was not growing as expected particularly in the southern zone of the country. Meanwhile, demand had started to improve in the north side, though prices remained in flux because companies had expanded capacity much greater than the growth in demand that was being seen. In the third quarter, retention prices fell about 30-35 percent as companies hustled to keep volumes going.

Even though total sales during the period rose 7 percent (of which exports grew 26 percent and occupied a share 17% share in total in 9MFY20 against 15% last year), cumulative revenues evidently fell due to the price dynamic. Another perhaps important point is the higher share of clinker in total export (about 47% of all cement exports) composition where clinker typically fetches a lower price compared to cement. Despite Indian market closing doors to Pakistani cement, companies have been able to find market spaces left open by other suppliers. Many typical exporters to smaller countries have moved to bigger markets such as China to meet its demand leaving space for Pakistan to step in.

The uncertainty of coronavirus is very real and demand will continue to display signs of unpredictability. Unless lockdowns open, countries will not be spending (and importing) too much construction materials and will likely focus expenditures on health and safety nets rather than infrastructure. Meanwhile, closing borders with regional markets such as Afghanistan also does not bode well.

Though the construction package announced by the PM has raised hopes that many stalled projects will be breathed new life into, how soon will that happen given current smart lockdowns and how fast construction will re-begin will largely dictate demand as well as price dynamics moving forward. Needless to say, the full-year financials will not be too far from the current situation.

https://www.brecorder.com/2020/05/07/594897/cements-brave-face-on/

 

[ejaz007]

Cement: trouble brewing
BR Research 06 Oct 2021

Facebook

Twitter

Whatsapp

Comments

If cement manufacturers are worried, they should be. It is not that cement mills don’t have the capacity to churn out clinker to meet demand, because they certainly do, but the demand is very evidently not materializing like it had been hoped. It is also entirely possible that cement bosses are thinking long and hard before burning precious coal to produce enough cement to meet the demand. While the country was busy worrying about oil price rallies, coal has quietly become a rather expensive habit to keep. Cement industry being the largest user of coal, will bear most of the brunt.

During first quarter FY22, cumulative cement dispatches have fallen 5 percent with demand overseas for Pakistani cement slowly dying out. Exports fell 42 percent. If cement makers were merely balancing out the sales mix in favor of domestic markets, domestic dispatches during the quarter would have been higher. So, while sales in local markets grew 4 percent during the quarter, demand — that the industry has been hinging on — is just not robust enough. If that is indeed the case, and the industry is not deliberately rationing production, that throws a large wrench into industry’s financial forecasting.

Coal prices have grown dramatically, only exacerbated by the dramatic rally in container freight rates. For instance, coal originating from South Africa (Richard Bay) has increased by 140 percent in value between Aug-21 and the same month last year. Price hikes have been coming on strong since last year (read more: “Cement’s coal play”, Oct 5, 2021). Meanwhile, container freight rates have also been growing steeply since Jul-19. According to global container freight rate index, between Sep-20 and Sep-21, containers rate has gone up from $2,247 to $10,323. Baltic Exchange Dry Index that tracks and records freight costs for dry bulk materials such as coal and iron ore cargoes recorded a growth of over 300 percent (or 4.7x times higher) between September of last year and now. Amid all this, the rupee is also becoming weaker against greenback.

While supply-side snags hitting the global supply chain are expected to subside — it is not happening this year. In fact, nobody is counting on improvement in freight costs during 2022 which does not bode well for manufacturers that depend on imported inputs for production. Coming their way is massive cost inflation around which they would struggle to preserve margins.

If the first quarter numbers are any indication, the cement industry must deal not only with a costlier dollar, costlier coal, and costlier transport, but also with shaky domestic demand amid underconfident export markets not hungry enough for Pakistani cement. If domestic demand does not meet its promise, cement manufacturers will also lose pricing power in local markets which had been maintained thus far.

Cracks are appearing now in an industry that was on the way to recovery but alas, recovery was largely short-lived. Challenging times ahead.

Cement: trouble brewing

If cement manufacturers are worried, they should be. It is not that cement mills don’t have the capacity to churn...

www.brecorder.com

 

[ejaz007]

Cement exports under pressure
BR Research 05 Jan 2022

Facebook

Twitter

Whatsapp

Comments

Though cement manufacturers are really counting on domestic demand—on the back of which a whole lot of them are investing large sums of money into capacity expansion—offtake thus far leaves a lot to be desired. Historically, when domestic demand is booming, exports take a backseat and when domestic demand is slowing down, exports contribute a critical share in total offtake. It makes more economic sense to sell domestically where prices are more desirable and less competitive. Naturally, the desire to sell abroad only becomes urgent when domestic demand is not keeping up with expectations. It serves as a buffer, but an important one. The short-term outlook for this year is not great.

Volumetric and dollar value exported per ton data from Pakistan Bureau of Statistics (PBS) shows that in most months of FY22, exports have fallen year on year. Exports fetched a higher price this year, compared to the previous year (see graph). This is because clinker exports have weakened in key markets which on average fetch $10-12 per ton less than cement exports. Cement buyers are also paying a higher cost of freight since Covid-19 hit where freight rates have grown 4-5x over the past year. For Pakistani exports, there is also a visible shift in markets where once Afghanistan used to dominate but has since become a less receptive market.

Only a few years ago, Pakistan was the biggest supplier of cement to Afghanistan. The share began to drop significantly when Iranian cement found its way into Afghan markets. This necessitated Pakistani cement makers to try selling and increasing outreach to other regional as well as far-off markets. South Africa, India, Sri Lanka and other African markets came to the rescue as exports to Afghanistan dropped.
But until recently, Pakistan was still exporting a large quantity of cement to Afghanistan. Now the situation is direr given the ongoing political turmoil in that country which has caused massive uncertainty in how soon that market may recover. Meanwhile, exports to India were almost banned in 2020 given triple-digit countervailing duties imposed on Pakistani goods. In 2017, cement exports to India constituted 30 percent of total exports; in only three years, that market has all but vanished.

Pakistan was also exporting significant tons of cement to South Africa. By 2014, the share of South Africa in total exports had grown to 16 percent, but in 2016, South Africa slapped anti-dumping duties on Pakistani cement having found its domestic industry under injury due to dumping from Pakistan. Exports to that market fell like a lead ball since then. These duties were supposed to be lifted this year, but exports have not resumed as much due to outcries from South African cement manufacturers. At the same time, one of the biggest cement exporting nations Vietnam grabbed this opportunity to establish its roots in South African markets. Most recently, in a bid to protect domestic manufacturers, South African government has imposed an outright ban on imported cement for state projects i.e., all public-sector projects will procure only local South African cement.
With South Africa and India out, and Afghanistan under conflict situation, cement exports have to be diverted elsewhere. Clinker to Bangladesh and cement to Sri Lanka started to become more feasible options, except right now, the Sri Lankan economy is undergoing an economic crisis of epic proportions. The country has no funds available and is facing significant food inflation. Half a million people have sunk in poverty during the pandemic and current financial crisis could lead the country into bankruptcy.
This means, Pakistani cement exporters to the country can bid farewell to any dollars coming from Sri Lanka at least for now.

That leaves other African countries like Kenya, Madagascar, Mozambique and Tanzania among others, but historically these markets have not contributed more than 5-6 percent in Pakistani cement exports.
They will have to do for now as traditional markets recover. Though, few hopes should be latched onto Sri Lanka, India or even Afghanistan this year.
Last month in November, exports grew not only month on month but year on year but there are very few regional markets left for cement makers to reasonably sell to. The pressure on domestic economy taking off is on, but is it? (Read more: “Construction and Housing: Boom, doom or bust”, Dec 31, 2021).

Cement exports under pressure

Though cement manufacturers are really counting on domestic demand—on the back of which a whole lot of them are...

www.brecorder.com