Name any random object in Pakistan and chances are, someone has organized a conference on it. Our national love for conferences – day long, two day long, weekend long seminars that go on and on – is endless. Sometimes neither participant nor organizer at the end of a conference can figure out exactly what the need for this conference was.
Not so the latest conference organized by AKD Securities: this being the Pakistan Cement Conference, with Lucky Cement, DG Cement, Attock Cement, and Gharibwal Cement. This was necessary: as a note sent to clients on September 16 by Shahrukh Saleem showed, that while cement companies were optimistic about the future, rising coal prices threatened to cause some worry in the years ahead.
So first, on the demand side: all companies showed an overwhelming sense of optimism, with an estimate of growth of 8-10% year-on-year in fiscal year 2022. Most of this is because the private sector is expected to continue providing support . The 20% year-on-year increase in local demand for fiscal year
2021 was a mix of pent-up demand and initiation of work on private sector projects. According to Saleem, more private sector projects are expected to be initiated in the shape of housing schemes and high rises, helped by the construction of dams as well
When it comes to exports, cement sent to Afghanistan seems uncertain, while perhaps they might increase in the months to come as a rebuilding effort begins. There were additional concerns about Iran cement players that might dominate the region. Perhaps the biggest concern was how international prices might be disrupted because of coal prices: for instance, sea based clinker exports would become infeasible with the increasing coal costs, while the margins on cement exports is expected to reduce.
This brings us to the main problem: coal prices. The average cost of the coal inventory is $100-110/ton – but recent shipments have been arriving at much higher rates of $140-150/ton. Since December 2020, coal prices have risen by an astonishing 77%. Worse,at least Rs60-70/bag has still not been passed on to customers, affecting coal players. The federal government has tried to control the increase in the price of commodities, and also tried to stop local players from increasing prices, which means a decline in margins from the second quarter of fiscal year 2022.
The companies present at the conference did not expect coal prices to drop before the end of 2021, at best. What about local coal? The use of Thar coal for instance has many limitations: high freight costs and high sulfur content. No one is also willing to take up the risk of innovating Thar coal to be usable, uncless coal prices continue to rise. It doesn’t help that during this period fuel and power costs have also been rising, along with the prices of furnace oil.
So where does that leave the individual companies? Lucky Cement, for its part is doing fine. Its most recent expansion was going to become operational in December 2022, of which the total capital expenditure will be Rs23 billion, and of which 505% will be financed through debt. The current coal inventory has an average cost of around $100/ton , but cash flows can decrease if prices are not increased soon.
Meanwhile over at DG Cement, their expansion was delayed over land-marking issues and a ‘law and order’ situation. Their project is estimated to cost $250 million and will be financed using a mix of debt and equity. Despite the gloomy mood, their management seemed upbeat about coal demand and was even pursuing cement export contracts which if materialized will significantly increase cement exports.
Attock Cement wanted to expand its company by 1.3 million tons, which was expected to start in January 2024. Attock Cement got concessionary financing for the capital expenditure of about Rs4.7 billion under TERF, and Rs5 billion under LTFF. More excitedly, its solar power project is almost complete and expected to be operational in October 2021.
Finally, Gharibwal Cement. Unlike the companies it did not expand in the last expansion cycle, but is currently at least in the process of contemplating one. Should it be given the green-light, it would become operational in two years. The capital expenditure of this project would be about 20-25% lower than other projects of similar size.
As for Saleem, he seemed more cautious about managing expectations. “We expect the cement sector to remain under pressure in near term given the aforementioned reasons with margins expected to take a hit in the second quarter of fiscal year2021,” he said. However, he also added that once coal prices retreated, the sector would be back in the limelight. He also looked favourably on Lucky Cement as the one company that was a low cost producer and which had a diversified portfolio with exposure to the automobile sector.