GROUP NAME:

SPARKERS

CEMENT SECTOR ANALYSIS

Introduction of Sector1947

• 4 cement factories-capacity of 0.5 Mln tons

1972

• 14 cement plants-2.5 Mln tons• The industry was nationalized• The state cement corporation of

Pakistan (SCCP) was established

1985-86

• Cement industry was deregulated• GDP growth rate of 6.5%, high import

of cement• Process of privatization occurred in

1991

2000-10 •Increased production capacity from 16 million tons in 2000 to 44 million tons in 2010

2014 •Production capacity as on march 2014 is 44.64 million tons

Significance of IndustrySecond best performing sector in KSE.Pakistan is the 5th largest exporter of

the world.Cement export ranked 10th in the

major export list of Pakistan.Major export market:

Iraq African countries Middle eastern countries Afghanistan India

Export share

Source: APCMA

Q1. Recent expansion plans announced by leading cement manufacturers … what are they and how is that going to affect the cartel dynamics?

Expansion plans of Cement sector

DGKC is planning to add capacity of 2.5-2.6 million tons in the northern & southern region.

Cherat cement company is looking for expansion.

.

Continue…..

Lucky Cement Pakistan's first plant in Iraq would start production by end of this year.

Lucky Cement is also making an investment of $ 230 million to set-up a cement plant in Congo

How Expansion Effect on Cartel

CARTEL A cartel is a collection of businesses or

countries that act together as a single producer and agree to influence prices for certain goods and services by controlling production and marketing.

Adam Smith, the father of modern economics: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

Expansion affect on cartel"No one can stop you if you want to

increase your capacity because it is the right of the company," Tabba CEO of Lucky Cement.

According to directors of Lucky and D.G khan cement: “There is no such effect on cartel due to expansion plan of some cement manufacturer.”

FCCL, brought the country’s largest single line plant (7,200tpd) in FY12 to become the 4th largest cement manufacturer in Pakistan having capacity of 3.4mn tons, from only 1.2mn tons previously. This aggressive capacity addition has started bearing fruits as the company has already achieved 26% YoY volumetric growth during 9MFY13.

Q 2. Mergers and acquisitions if any … possibilities and likelihood? Companies interested in acquiring other companies? why? Impact on cartel dynamics?

Mergers and acquisitionIn the year 2004, Dewan Cement

acquisition of controlling stakes in Pakland and Saadi Cement.

Dewan Mushtaq Group acquired 36.2 million shares (62.8 per cent holding) of Saadi Cement and 34.6 million shares (41.9 per cent holding) of Pakland Cement. 

Cont…

In the year 2005, Al-Abbas group including two stockbrokers and an industrialist jointly bought Essa Cement Limited, by paying the liabilities against the majority share holding.

Effect of Mergers and Acquisition on Cartel

By reviewing the history of Mergers and Acquisitions there is no significant effect on cartel dynamics.

Q3. Further Growth potential within the sector?

Growth Potential Within The Sector

SWAT: The Khyber Pakhtunkhwa government would construct 350 small dams in the province, ( Imran Khan).

Darawat dam in process.

Cont….

Karachi-Lahore motorwayJamshoro coal power plant.Dasu Hydropower ProjectTwo coal-based power projects at

Gadani

Q4. Consider power related issues .. type of fuel mix being used to neutralize impact of high electricity cost and gas shortage.

Power related issues60-70% is the cost of energy in the

production of cement.Coal, Gas, Oil furnace, ElectricityInitially 90% of coal requirement of

Pakistan cement industry were being met by imports.

Loadsheding of gas is another issue.Relying on WAPDA for electric supply

but now the companies have their own electricity generator plants due to problem of loadsheding.

Cont….Stagnant supply of domestic gas;

persistent inefficiencies in energy-related public sector enterprises and inadequate infrastructure for gas import. “While all economic sectors have been affected by the energy shortages, the industrial sector has been the worst hurt,”

Cont…“It is estimated that around a

dozen re-rolling units in Punjab have installed coal gasification plants in the previous two years,” the report revealed and added that those plants were imported from China, with cost ranging widely between Rs4 million and Rs30m, depending upon size and specification.

Q 5. Distribution/ dispatch issues … exports less attractive since PKR is now stronger but at the same time cost of goods imported is now lower (e.g. Coal).

Distribution/ dispatch issuesCoal is the single largest cost

component for the cement manufacturers, constituting around 45% of the manufacturing cost.

Cement sector has been the major beneficiary of falling coal prices in FY13

Cont…5.6% PKR appreciation

against greenback since Jan’14

A threat for companies having larger share of exports. Rupee appreciation, if sustained, can have material earnings impact for cement industry as exports contribute 25% of total industry sales. 

lower coal costSouth African R-Bay coal prices

are hovering at US$72.8/ton, down by 14% since Jan’14.

We have incorporated coal price of US$80/ton for FY14 in accordance with Macquarie Research.

Cont….The earnings impact on FS cement

universe in two scenarios; 1) coal price of US$80/ton (-7%)

coupled with exchange rate of PKR106/USD (+3%) and

2) 13% decline in coal cost to US$75/ton amid 5% PKR appreciation (PKR104/USD).

Under the scenario 1, FS cement universe earnings may increase by 2.4-5.4%. Decline in coal prices largely offset the negative impact on cement players of PKR appreciation due to export sales. The earnings can go up to the tune of 4.5-10.4% if scenario 2 is prevailed. 

Cont…Stronger than expected forex

reserves have appreciated PKR by 5.6%  against USD since Jan’14 posing pressure on companies having larger chunk of exports in their sales mix.

However, lower coal prices of US$72.8/ton would play a mitigating factor and likely boost primary margins to record a high of 63-65% if prices remain intact.

Q 6. Price war ... Is it possible? Why? When?

Price War

Growing mistrust amongst industry players on the price mechanism grew so much that major players threatened to leave the (APCMA).

Investors were fearful of the re-emergence of a price war. The cement companies have adopted a more accommodating attitude and are now settling their issues to try to, and remain, on the same page.

Cont… Nobody is a winner in a (price)

war!The local cement industry learned

hard lessons from the past price wars, when nobody came out as a winner. Small and medium cement players were suffering from losses while big players were only witnessing subdued earnings growth

Cont..

Only big players can dare, but even they can’t afford it!

Strong likelihood of breaking up the status quo could only come from large cement players, who are operating at lower utilization levels.

Healthy demand growth lowers the probability of price war

THANK YOU

Referenceshttp://www.google.com.pk/#

q=apcmahttp

://www.comcom.govt.nz/business-competition/fact-sheets-3/merger-assessment/

http://thefinancialdaily.com/NewsDetail/146513.aspx

http://www.apcma.com/data_monthly1314.html

http://www.investopedia.com/