Cement makers continue to enjoy rising gross margins, benefiting from the decline in global coal prices. At the end of FY2015, the price of coal, a key raw material for the cement industry, was $60 per ton, down 16% from a year earlier. The latest data show that the price of coal is close to $50 per ton.
Pakistan's domestic coal prices are expected to continue to fall in the short and medium term as China's demand for coal decreases as it addresses growing environmental problems and economic slowdown. Since 2000, 80% of the increase in global coal consumption has been due to the growth of China's consumption.
Domestic cement sales in Pakistan continue to be strong, accounting for 82% of total sales in the first quarter of FY16, compared to 70% in 2011, and the industry's total revenue is expected to continue to grow.
In the past two decades, the cement industry has always maintained a leading level in terms of production capacity to meet the growing domestic demand. From 10 million tons ten years ago to 45 million tons at present.
Although the average capacity utilization rate of the industry is about 80%, some leading enterprises have reached more than 90%. Pakistan's domestic economy will continue to grow as a result of the China-Pakistan Economic Corridor Project. Cherat, Attock and DG Khan Cement (DGKC), among the eight major cement manufacturers in the country, have already decided to expand their current production capacity, with plans to increase their capacity by 1.3, 1.1 and 2.7 million tons respectively.
Cherat Cement's expansion plan is expected to be completed in the first half of fiscal 2017 (September 2016), while the other two are expected to be completed in fiscal 2018.
In addition, recent news shows that Lucky Cement intends to increase its production capacity in the northern region, with a scale of about 1.1 million tons, and plans to put into production in fiscal year 2019.
If the expansion of the four major producers is completed, Pakistan's domestic cement production capacity will increase to 53 million tons. Although the upcoming capacity expansion will lead to various doubts about whether domestic cement prices can remain stable in the future, even if the capacity expansion benefits from the good economic expectations in the next eight years, the capacity utilization rate of the cement industry can still be maintained at 80%.
For the domestic market, cement sales are expected to grow by 5% to 6% in the next 8 years. However, the industry expects export sales to decline to about 10% from 2016 to 2017, 5% from 2018 to 2020, and remain stable thereafter. After the relatively conservative compound growth rate of 3.5-4.5%, the cement industry is still bright due to the good prospects of economic growth, and the capacity utilization rate is expected to reach 90% in 2022. However, the key variable in capacity utilization is the further significant expansion of capacity by producers in the industry.
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