The expansion plans of cement companies coupled with hike in global coal prices amid deteriorating macroeconomic situation in Pakistan might lead the sector towards a price war.
In a report on Saturday, Cedar Capital analyst Ali Shah Khawaja said that players of the sector had announced massive expansion plans.
“Looking at previous expansionary cycles, it is clear that an ample period of time elapses until the industry is able to reap the rewards of its investment,” he said. “However, the sector has missed out on the expected gains this time.”
According to him, early expansions plans in light of depressed earnings and dismal macroeconomic outlook stood as risks for the sector, he added.
The only option that contradicts the forecast is if players decide to abandon their expansionary plans altogether but under the present dynamics, this seems like a far-fetched idea because major players have started implementing their expansion plans.
He was of the view that concessionary financing, availed by five major industry players, was a curse in disguise as it fast tracked expansion plans.
“Cement demand has been growing at a steady pace for the past three decades,” the report added.
Cement sales fall as input cost rises
In comments to The Express Tribune, Arif Habib Limited Head of Research Tahir Abbas said that in the past, price wars had emerged close to the date of commercial operations of new expansions.
“At present, domestic demand appears robust while local players are already struggling to keep margins afloat therefore a price war may not be witnessed in the immediate future,” he said. “However, a price war cannot be ruled out after the new capacities come online and the utilisation drops.”
Several plants have availed State Bank of Pakistan’s Temporary Economic Refinance Facility (TERF) or Long Term Financing Facility (LTFF) to import machinery for their upcoming expansions in a bid to benefit from low cost financing schemes, he said.
These projects are expected to come online between 2023 to 2025 and they will enhance total capacity of the sector by another 30 million tons.
Taurus Securities analyst Mustajab Ali Kazmi said that margins of cement sector have reduced due to higher coal price in the global market.
In fiscal year 2020-21, coal prices in the international market had stood at around $80 per ton but now it has surged to over $200 a ton.“The cement demand is still high due to incentives given to the real estate sector,” he said.
Published in The Express Tribune, October 10th, 2021.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.