In Focus: Cement Sector (05112008)

Cement export has crossed a record mark of 1mn ton in a single month, supported by 3.35 percent growth in total dispatches.
Pakistan's cement export witnessed a phenomenal growth of 72.7 percent during first four months of current fiscal year and crossed the record mark of 1mn ton in a single month. The growth in export was due to high demand and its shortage in the region, especially in Dubai, Afghanistan and India, where construction activities are at peak. The huge growth in export supported the total dispatches as over all dispatches showed a minor 3.35 percent growth. Export are now playing vital role as its contribution to total sales is at 36 percent in Jul-Oct09 against 21 percent in last year. We believe exports will continue their rising trend but will cool down in 3Q09 as regional capacities is expected to come online while demand slowdown due to global recession.
Domestic demand under pressure, Local
dispatches dip by 15.4 percent YoY
Local dispatches declined by 15.4 percent YoY to 6.32mn tons during 4M09 versus 7.72mn tons in 4M08, as construction activities slow down due to the poor economic circumstances. However, local dispatches registered a slight increase of 2 percent on MoM owing to the lower demand during Ramadan along with some boost in construction activity before the upcoming winter season. Going forward, we foresee a further down side in local demand on the back of high inflation, higher financing rates. Moreover, Pakistan may go to IMF program that is likely to result in curtailment of government infrastructure spending.
Profitability of the sector climbs by 133.5 percent in 1Q09
Profitability of cement industry witnessed a huge rise in 1Q09, where the sample of fifteen cement companies representing 92 percent of the market capitalisation of the sector posted a massive increase of 133.5 percent in 1Q09 to Rs1.48bn versus Rs632.4mn marked last year. The huge growth in profit has been seen on the account of higher local retention prices and rupee depreciation enhancing rupee based export sales. Higher local prices (50 percent) and better export retention prices (58 percent) amid rupee depreciation (30 percent) resulted in net sales growth of 96 percent. Resultantly, gross margins doubled to 30 percent in 1Q09 as against 15 percent in 1Q08.
Outlook
Despite weak demand dynamics, 2Q09 is expected to be better than the same quarter last year due to Ex-Factory prices of cement being on high level of Rs370 per 50 kg bag. Along with the declining trend of coal prices (US$167 per ton to US$95) the gross margin of the sector are likely to rise. However, any decline in retention prices on the account of weakening local demand, meltdown in coal prices and expansions could add a pressure on gross margin.