Pakistan Cement :FO generation is back in the game,(AKD Daliy, Nov 21,2019)
- Domestic FO prices are falling in-line with global trends as IMO2020 imparts its magic, capping the allowed limit of sulfur in shipping fuels to 0.5% against previous limit of 3.5%, resulting in expected decline in global demand to 1.55mnbpd against 2.86mnbpd in CY19.
- This decline is causing a shift in power generation preferences where FO based power generation now stands cheaper than the grid while closely competing with natural gas. We opine, a continued decline in FO prices can allow power generation on FO to be cheaper than natural gas.
- For cement manufacturers, Punjab-based players can turn out to be significant beneficiaries in the current scenario, where increasing RLNG prices forced them to prefer the grid. We estimate DGKC to save PkR8/bag on production at Kalar Kahar while MLCF and FCCL are expected to save PkR3/bag.
- Among other potential beneficiaries, we highlight LUCK’s Pezu’s plant and DGKC’s South palnt with the former expected to face gas shortages in winter while for latter, decreasing FO prices can result in FO based power generation being cheaper than KE tariff.
- In this backdrop, we believe players like LUCK, MLCF and DGKC will continue to enjoy an advantage over others after already selling well above their capacity based shares in 1QFY20, capitalizing on low cost of production in an environment of price competition where decline in FO prices can provide further impetus to these players.
AKD Research
Fauji Cement is engaged in the manufacturing and marketing of cement.
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