Cement exports recorded a phenomenal growth of 111 per cent during six months of the current fiscal year to reach US$135.672m. According to the official statistics on cement export for July-December FY-08, in the manufactures category, Pakistan earned US$135.672m or Rs 8.237mon exporting cement during July-December 2007 against US$64.367 earned in the said period of last fiscal.
The cement manufacturers exported 2.3Mt cement during first six months of FY-08 as compared to 1.14Mt in the corresponding period of FY07.
Due to regional supply shortages and delays in capacity expansion, Pakistan continues to provide regional importers a freight advantage.
Lucky Cement is likely to be the biggest beneficiary of the ongoing regional cement supply shortfall in the Middle East and India as it is the only cement producer located near the Karachi port.
As the leader in terms of capacity, Lucky Cement is to divert a major portion of its production towards cement exports over the next two-and-a-half years in relation with the export window, which would allow Lucky Cement to record a two-year (2008-2009) export growth CAGR of 48 per cent.
However, by end-2009, its regional capacities are to come on stream, which may hurt Lucky Cement’s exports. Hence, post-2009, it is assumed that the company’s sales mix to once again be focused towards domestic demand, this was disclosed in JP Morgan research report on Lucky Cement. It is important to note here that the company is the first Pakistani company to acquire certification for exports from the Bureau of Indian Standards. The company has already started exporting to India in small quantities. A pick-up in the pace of exports to India should be a near-to-medium-term catalyst and drive further stock price performance in spite of the recent run-up.
Even though, more expansions and surplus capacity could put pressure on domestic cement prices and result in margin contraction but the smaller players are more vulnerable to decline in cement prices due to capacity expansions and a slowdown in domestic demand.
The ongoing short-supply in the region is not likely to last forever and in line with this the possible slowdown in Pakistans cement exports post- 2009 due to upcoming regional capacities, particularly in India, Iran, the UAE, Egypt, and Saudi Arabia.
Report further said, in the medium term, India and sustained demand from the Middle East would drive Lucky Cement’s bottom-line growth. However, over the long term, after a likely moderation in export demand (by 2010), the domestic demand due to infrastructure development would keep earnings growth stable with a five-year (2008-2012E) revenue and EBIDTA CAGR of 11 per cent and 13 per cent, respectively.
The report revealed that domestic demand has been growing at a three-year historical CAGR of 19 per cent and shares a strong 0.9 correlation with the country’s real GDP growth. During FY07 at 24 per centY/Y, the domestic cement demand grew at 3.5x the real GDP growth.
"With the demand from housing and infrastructure development picking up, we estimate the countrys domestic demand to remain robust, diligently tracking the growth in real GDP. Having the highest share in capacity and plants in the north and south, Lucky Cement should not find it difficult to divert dispatches sale for domestic consumption in case of a slowdown in exports due to the availability of surplus capacity in the region. A higher-than-forecasted increase in industry capacity could put pressure on local cement prices as has been seen historically. In our financial model, report projects 8 per cent increase in prices in FY08 and a 3 per cent increase in FY09-FY012," it said.
In FY07, local cement consumption reported a 24 per cent YoY growth, taking total dispatches to 21Mt, up from 16.9Mt in the corresponding period last year. The strong growth in local cement demand is backed by improving macro fundamentals, increased government spending in infrastructure development; the private housing construction boom given the growing purchasing power, and mega housing and commercial projects by large local and multinational real estate developers.