Pakistan Cement Sector – Revising Demand and Supply

Fecto Cement Ltd (FECTC) may be the latest addition to the expansion club as media reports signal intent for a PkR12bn cement plant near KalarKahar. If FECTC goes ahead, estimated 950k tpa Greenfield capacity (at US$120/tpa) will likely take 2.5‐3 years to come online after financial close.

• Thus far, officially announced expansions total to 4.9mn tpa (CHCC + DGKC + ACPL) while as per media reports, an additional 7.2mn tpa could soon be announced (LUCK + FECTC + Chinese investment), taking planned expansions to 12.1mn tpa. Local demand growth of 7%pa. (FY15: 7.9%YoY) should be able to absorb this incremental capacity with potential for +ve surprises from CPEC and PSDP spending.
• We flag that any major expansion announcements above 12.1mn tpa will require local demand to grow above 7%pa, in the absence of which pricing concerns could arise from a medium‐term vantage. For now, we point to strong demand, high margins and sustained pricing discipline to reiterate our Overweight stance on Pakistan Cements particularly in the aftermath of the recent 50bps interest rate cut. Top picks are DGKC, CHCC and PIOC.

FECTC: Latest member of the expansion club

FECTC has reportedly expressed its interest to setup a cements plant near KalarKahar with PkR12bn investment. At an assumed cost of US$120/tpa, this Greenfield plant will likely host 950k tpa capacity and take2.5‐3 years to come online after financial close.
Recall that FECTC’s existing plant of 819k tpa near Islamabad operated at 82% capacity utilization in 9MFY15 even as its quarrying is suspended since Mar’15 under a court order (environmental concerns). Quarrying license for the aforementioned Greenfield plant will likely mitigate risks emanating from any unfavorable court ruling.

Expansions signal strong demand outlook

What about risks to future pricing discipline?

Cement pricing discipline has held up over the last 5yrs with the industry (capacity: 45.6mn tpa) currently running at 78% capacity utilization. Estimated fresh capacities of 12.1mn tpa will require local demand growth at 7%pa. (in declining exports scenario) in order to be comfortably absorbed without distorting pricing discipline. That said, if further major expansions are announced (e.g. by MLCF, KOHC etc.), it would likely require local demand growth of more than 7%pa. and/or reversal in declining exports trend to prevent an oversupply situation which has previously resulted in price wars.