Central Bank of Pakistan reviews progress of cement industry in FY18

The State Bank of Pakistan has released its annual report on Pakistan's economy for the fiscal year 2017-18. According to the report, the growth momentum gained further strength as the economy achieved its 13-year highest real GDP growth of 5.8 per cent in FY18. The GDP growth was also broad-based, as all the three sectors – agriculture, industry (including cement) and services – contributed positively to this acceleration, the report highlights.

The cement industry, with more than one-fifth share in overall large scale manufacturing growth, registered a growth of 11.1 per cent during FY18 compared to 4.5 per cent last year. The industry benefited from improvements in capacity utilisation as well as increase in production potential. While industrial capacity grew 6.6 per cent to reach 49.4Mt during FY18, the utilisation levels also reached historical high of 93 per cent. This facilitated the industry to meet demand of widespread construction activities, as reflected by strong figures of local dispatches, which surged 15.4 per cent during the year.

Similar to steel, the growth in cement industry is also driven by China-Pakistan Economic Corridor (CPEC) related projects, public sector development spending and the ongoing construction of private housing schemes. Anticipating further demand in the years ahead, the industry players are investing heavily in capacity expansions, mainly to consolidate their positions in a high-margin domestic market as well as major export destinations.

Suggestions from banks
Nevertheless, the absorption of excess cement output in future would depend on:
a) the continued work on housing schemes to bridge the housing deficit, especially in urban areas
b) the demand emanating from public sector projects which also rely on the utilisation of budgeted Projects Under Public Sector Development Programme (PSDP)
c) the continuity of projects and special economic zones under the CPEC umbrella.
Furthermore, the enhanced capacities of the industry may also lead to improving external competitiveness and induce cement industry to explore new markets.

Exports of cement
According to report, encouragingly, quantum of cement exports also witnessed an increase of 1.8 per cent after eight consecutive years of contraction (average contraction of 10 per cent during last eight years). This occurred on the back of significant rise witnessed in shipments to Afghanistan, South Africa, Madagascar and Senegal during the period.

However, the domestic demand for cement has far outpaced exports in recent years. It may be noted that the industry used to export around a quarter of its annual output during FY01-09, the share of which has now came down to only one-tenth. This decline in exports share is conceivable due to installation of industrial units in the key cement export destinations such as South Africa and Afghanistan that may impose high tariffs on cement imports to protect their own industries.

Quantum cement exports, meanwhile, ended their four-year consecutive decline in FY18, rising by a one per cent on YoY basis. Surplus availability of the material, in the wake of additional capacities coming online in 2H-FY18 in the south, seems to have stimulated some firms to look towards export markets through the sea, mostly to African markets.

At the same time, tightening of border controls with Afghanistan appears to have partially shifted the cement trade to formal channels. Customs data indicates that Afghanistan accounted for the highest YoY increase in Pakistan's quantum cement exports in FY18. This, coupled with a strong rebound in shipments to African countries (particularly South Africa and Mozambique), offset the drag from lower exports to India and Sri Lanka in the year. Border tensions with India in FY18 also appear to have affected the cement trade, with dispatches declining by 3.2 per cent YoY, after rising 26.3 per cent in FY17.

Going forward, Pakistan's cement exports to Afghanistan are expected to maintain their rising trend, as supply from Iran – a major supplier of the material to that country – may come under pressure due to re-imposition of financial sanctions by the US.