It looks as though Pakistan cement prices will remain around Rs200 per bag at least till the end of this financial year due to a stagnation in demand and especially the break-up of the cement cartel following massive capacity expansion in the sector.
Cement demand has not increased as much as the manufacturers had expected when they undertook their capacity expansion plans. They had started capacity expansion foreseeing a surge in demand after General Pervez Musharraf government took an encouraging stance on construction of mega reservoirs in the country owing to shortage of water that the country often faces. Moreover, the demand for cement was seen rising after the devastating earthquake in North West Frontier Province and other northern parts of the country.
All their hopes dashed to the ground when their capacity expansion led to a price war among them because of unavailability of additional buyers, resultantly bringing down their profits. The cement prices have fallen from as high as Rs400 per 50kg bag in March this year to Rs180 in some parts of the country now. Neither the government has started work on any of the major dams nor has the reconstruction in the quake-hit areas gathered momentum.
However, those who keenly watch the cement market situation expect that the price war would end by the end of current fiscal and a marketing arrangement among the cement manufacturers would be back in place by early next financial year. They expect that the cement prices would then stabilise around Rs250 per bag.
But the cement cartel has met its end after it had fleeced the consumers of the country for many years, which had been possible due to the inaction of the Monopoly Control Authority and the government’s disregard to consumers’ interest.
Even now it is not that the consumers have become dear to the government or the MCA has turned very active, but it is the demise of the arrangement between the cement manufacturers that has caused the prices to fall substantially during the last few months.
However, there are a few companies that have managed to keep their profits in this price war situation among the manufacturers owing to different factors.
Due to its premium quality and relatively low capacity addition in the Southern region as compared to the North, Attock Cement’s ‘Falcon’ brand seems to have no problem keeping its wings widely spread. It is one of the few companies to have posted healthy earnings in the first quarter of this fiscal.
Due to its proximity to Afghanistan and strong brand equity in the North, Cherat Cement has been relatively better off in FY07 so far. The company had only undertaken an 800 tonnes per day de-bottlenecking and instead of being crowded out by the gigantic expansions by other bigger players, the company has actually managed to increase market share from 0.3 per cent to 3.5 per cent.
Fauji Cement is also unlikely to be impacted much by the price war since it has not yet undertaken any expansion and also it has lower manufacturing cost as well as lower outstanding loans, which makes its financial position much better than others.