Pakistan: Cement Sector Faces Glut – OpEd
During January 2025, cement offtakes increased 14%YoY to 3.9 million tons, supported by 12%YoY growth in local dispatches and 30%YoY growth in exports. The increase in local dispatches was primarily due to the low base effect from previous year, when public construction activity was halted amid electoral activities.
The slight decline in cement prices supported local construction activity. In 7MFY25, total dispatches declined 2%YoY to 26.8 million tons, as an 8%YoY drop in local dispatches outweighed the 31%YoY rise in exports. On a sequential basis, total offtakes declined by 6%YoY due to seasonal (winter) slowdowns.
South’s utilization surges amid export growth. The daily domestic sales stood at 107,000 tons during the month under review, down 2%MoM, while 8% above the FYTD average of 99,000 tons.
Industry wide capacity utilization increased to 56% as compared to 50% during the same period last year. Regionally, North utilization remained lower at 49%, while South utilization surged to 86% from 72% during the period under review, supported by robust export growth, up 31%YoY.
AKD Securities expects sector profitability to remain strong, with its coverage universe projected to post 11%YoY earnings growth in FY25.
It also expects ease in coal prices to largely offset the cost pressures. Notably, Afghan coal prices have dropped around PKR5,000 ton following the reduction in tariffs by the Afghan government.
Cement prices are under pressure due to lower utilization, particularly in the North region, where prices have declined 4%YoY to PKR1,368/ ton. Subsequently, the price delta between North and South has also reversed to negative 1%, as compared to FYTD average of positive 5.4%, which is expected to benefit South-based players.
Looking ahead, the brokerage house expects cement prices to recover as offtakes improve post-winter.
AKD Securities expects FY25 local cement offtakes to contract by 6%YoY to 36.0 million tons, due to subdued construction activity given elevated cement prices, high inflation, increased FED and royalty rates, and reduced public spending. However, with coal price stability, the brokerage house anticipates exports to rise, leading to a total demand decline up to 5%YoY in FY25.
Despite demand pressures, the brokerage house maintains a positive outlook on the sector due to the expected improvement in profitability amid gross margin expansion and ongoing monetary easing.
Its top picks include LUCK and FCCL. It favors LUCK due to improvement in core margins, increase in dividend from power segment and recovery in cyclical segments. Whereas, FCCL is preferred on market share expansion along with efficient utilization of fuel and easing interest rates.