Elixir Securities Limited – Flash Note

Karachi, November 08, 2018 (PPI-OT): Pakistan Cement Sector – Dispatches from South Shine in an Otherwise Dull Environment

As per the news citing All Pakistan Cement Manufacturers Association (APCMA), cement industry’s dispatches clocked in at 4.5mn tons for the month of Oct-18, up 8%YoY on the back of strong demand emanating from South (32 / 227% YoY jump in domestic sales / exports).

Dissecting local dispatches in terms of regions exhibits North’s 2%YoY decline to 3.1mn tons. The reason for decline can be attributed to 1) curtailment of Public Spending Development Program (PSDP), 2) slowdown in the economy and 3) Southern players likely dispatching cement to Punjab.

Local dispatches in South however showed the opposite trend and clocked in at 0.83 mn tons (up 32%YoY). Growth in cement offtakes in South started showing a rising trend post Jun-18 (after D. G. Khan Cement, DGKC’s plant in South came online) and average YoY growth rose to 27% during the first four months of FY19 vs. average of 6.6%YoY during Jan-Jun’18. We believe that Southern players are dispatching cement to the North due to 1) Tax Incentive (DGKC has 5 year Tax Holiday on its Plant in South) and 2) higher domestic retention price when compared to export retention price. Export prices from South are currently as low as USD32-35/ton (translating into ~PKR225/bag) compared to average domestic retention prices of PKR300-330/bag.

While companies operating in both the regions (Lucky Cement, LUCK and DGKC) do not share plant wise offtakes, our understanding can be validated by the fact that as domestic offtakes started showing a rising trend in South, offtakes in North started to decline. Average YoY decline in 4MFY19 in North: -4% vs. average YoY growth of 16% during Jan-Jun’18.

Exports in North declined by 22%YoY to 0.26mn tons but improved 3.2x in South to 0.35mn tons. The improvement in exports from South is due to expansions by LUCK, Attock Cement (ACPL) and DGKC; as these players have started to divert their excess capacity towards lower priced exports.

During 4MFY19, domestic sales grew by a meagre of 0.8%YoY at 12.9mn tons (North/South: 10.2/2.7mn tons). Total exports remained strong during the period as Southern players were tapping into regional markets (total exports during 4MFY19: 2.4mn tons, up 39%YoY). Total dispatches during the outgoing quarter grew by 5.4%YoY to 15.3mn tons.

We expect dispatches to remain modest going forward owing to 1) slowdown in economy, 2) cuts in PSDP after entry into IMF and 3) drop in construction activities amidst rising interest rates (i.e. Home Financing). We also anticipate pressure on cement prices due to upcoming expansions in North while sticky coal prices on higher side also remain a key concern for the sector. Meanwhile, we maintain our assumption of flat domestic offtake growth in FY19.