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Pakistan Cement: Domestic sales estimated to fall in FY19 after 7 years

 

• Pakistan total cement sales during FY19 is expected to remain flat; closing in around ~46mn tons during FY19. This has happened after 7 years primarily due to slower economic growth.
• Effective capacity utilization during FY19 is anticipated to fall by 11ppts to 84% primarily on the back of multiple expansions by Maple Leaf Cement (MLCF), Cherat Cement (CHCC), Bestway cement (BWCL) and DG Khan Cement (DGKC).  
• Total domestic sales FY19 is expected to decline after seven years; down by 3% YoY to 39.8mn tons vs 41.1 mn tons during FY18A. The primary reason for domestic sales attrition can be attributable to 1) decline in govt. spending, 2) sluggish growth in GDP growth, and 3) rising inflation and interest rates affecting housing sector.
• The region wise data suggests that sales from the northern region are anticipated to decline by 6% YoY to 31.9mn tons owing to lower than expected demand from governments project due to a high base election year. On the contrary, cement sales in the southern region are expected to grow by 11% YoY to 7.9mn tons due to penetration of manufacturers in the south Punjab market.
• Total export sales is likely to grow by 37% YoY to 6.5mn tons majorly contributed by southern region, with sales expected to witness a growth of 141% YoY to 4mn tons. However, sales from the northern region are anticipated to fall by 19%Y oY to 2.5mn tons, respectively.
• The primary reason for healthy export sales remains the favorable dynamics in sea-based exports markets which have continued to benefit south based cement manufacturers. The new cement markets situated in East African and Far Eastern countries coupled with heavy clinker sales to Bangladesh; available due to the scarcity of supply from Vietnam have significantly added to the export sales of the region.
• On the other hand, border tension with India (contributed ~720K tons and 1.2mn tons in 9MFY19 and FY18) during Feb-2019 have completely tapered off volumetric sales from the said region denting export sales of the northern region.
• Outlook: We believe domestic cement demand will continue to depict a sluggish momentum primarily on the back of (1) sluggish GDP growth, (2) anticipated double-digit inflation, (3) lower govt. spending to manage fiscal deficit and (4) slowdown in the real estate market. While, on the exports side, we believe southern region sales will continue to depict healthy volumes. However, the north region may depict decline in export sales owing to the absence of Indian market.