Alternate Research (Pvt) Ltd. Cement Sector – Industry Analysis

Ali Jumani

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Major Players

• Lucky Cement Limited

• Bestway Cement Limited

• D.G.Khan Cement Limited

• Maple Leaf Cement Factory Limited

• Kohat Cement Company Limited

• Dewan Hattar Cement Limited

• Attock Cement Pakistan

• Pioneer Cement Limited

• Thatta Cement Limited

• Flying Cement Limited

• Cherat Cement Company Limited

• Askari Cement Limited

Market Segmentation

• Cement market in Pakistan is divided into two zones:

• North Zone

• South Zone.

• The North zone includes Punjab,

Azad Kashmir, KPK and the

upper region of Baluchistan.

• In North there are about 19 cement

plant units of 14 players with

annualized cement production

capacity of about 37MT

(81% of total country

capacity).

Market Segmentation • The remaining area of the Baluchistan and entire Sindh constitute

the Southern zone.

• South is having about 5 players with annualized cement production capacity of about 8.6MT (19% of total country capacity).

Industry Location

Cement Production Capacity & Dispatches

July to

June

Production

Capacity

% age

Incr/(Dec)

Local

Dispatches

% age

Incr/(Dec) Exports

% age

Incr/(Dec)

Total

Dispatches

% age

Incr/(Dec)

Capacity

Utilization

Surplus

Capacity

(Mn. Tonnes) (Mn. Tonnes) (Mn. Tonnes) (Mn. Tonnes) (Total) % age (Mn. Tonnes)

2000-2001 15.53 -5.16% 9.93 -0.04% - 0.00% 9.93 -0.04% 63.95% 5.60

2001-2002 16.10 3.65% 9.83 -1.01% 0.11 100.00% 9.94 0.06% 61.73% 6.16

2002-2003 16.32 1.37% 10.98 11.66% 0.47 342.53% 11.45 15.21% 70.16% 4.87

2003-2004 17.28 5.87% 12.54 14.25% 1.12 137.02% 13.66 19.31% 79.08% 3.62

2004-2005 17.91 3.65% 14.79 17.88% 1.57 39.96% 16.35 19.69% 91.32% 1.56

2005-2006 20.83 16.31% 17.05 15.29% 1.51 -3.83% 18.55 13.46% 89.08% 2.28

2006-2007 30.50 46.41% 21.03 23.38% 3.23 114.46% 24.26 30.77% 79.56% 6.23

2007-2008 37.68 23.54% 22.58 7.33% 7.72 139.06% 30.29 24.86% 80.40% 7.38

2008-2009 42.28 12.22% 20.33 -9.97% 10.98 42.31% 31.31 3.34% 74.05% 10.97

2009-2010 45.34 7.24% 23.57 15.95% 10.65 -3.03% 34.22 9.29% 75.46% 11.13

2010-2011 42.37 -6.55% 22.00 -6.64% 9.43 -11.47% 31.43 -8.14% 74.17% 10.97

2011-2012 44.64 5.35% 23.95 8.84% 8.57 -9.12% 32.51 3.45% 72.83% 12.13

2012-2013 44.64 0.00% 25.06 4.64% 8.37 -2.26% 33.43 2.82% 74.89% 11.21

2013-2014 44.64 0.00% 26.14 4.33% 8.14 -2.84% 34.28 2.54% 76.79% 10.36

2014-2015 45.62 2.19% 28.21 7.89% 7.20 -11.57% 35.40 3.27% 77.60% 10.22

2015-2016 45.62 0.00% 33.00 17.01% 5.87 -18.38% 38.87 9.82% 84.95% 6.29

22.00

23.95 25.06

26.14

28.21

33.00

9.43 8.57 8.37 8.14

7.2 5.87

31.43 32.52

33.43 34.28

35.41

38.87

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

2011 2012 2013 2014 2015 2016

Domestic

Export

TOTAL

5 Year Industry Analysis (In mt)

Exports Analysis |----------------Cement--------------| |---Clinker--| Export Breakup

Financial

Years

Afghanistan

Via Land

India

Via Sea & Land

Other Countries

Via Sea

Other Countries

Via Sea

Total

Exports

%age

Incr/(Decr)

North

Zone

South

Zone

|-------------------------------Quantity in Metr ic T ons-------------------------------| |--Quantity in MT --|

2001-2002 106,620 - - - 106,620 100.00% 106,060 560

2002-2003 430,322 - - 41,500 471,822 342.53% 428,602 1,720

2003-2004 1,118,293 - - - 1,118,293 137.02% 1,088,218 30,075

2004-2005 1,407,900 - 157,270 - 1,565,170 39.96% 1,516,370 48,800

2005-2006 1,413,994 - 91,165 - 1,505,159 -3.83% 1,409,492 95,667

2006-2007 1,725,476 - 1,111,405 390,973 3,227,854 114.45% 1,929,938 1,297,983

2007-2008 2,777,826 786,672 3,045,995 1,106,127 7,716,620 139.06% 5,111,607 2,605,013

2008-2009 3,148,306 634,455 6,061,035 908,690 10,752,486 39.34% 6,989,136 3,763,351

2009-2010 4,017,361 722,968 5,625,391 283,436 10,649,156 -0.96% 6,952,774 3,696,381

2010-2011 4,726,996 590,104 3,910,675 200,169 9,427,943 -11.47% 6,688,655 2,739,284

2011-2012 4,715,109 605,453 3,247,268 - 8,567,830 -9.12% 6,266,327 2,301,503

2012-2013 4,404,633 482,214 3,487,255 - 8,374,103 -2.26% 6,105,815 2,268,288

2013-2014 3,655,201 677,305 3,804,021 - 8,136,528 -2.84% 5,418,214 2,718,314

2014-2015 2,872,951 696,337 3,625,781 - 7,195,069 -11.57% 4,467,534 2,727,535

2015-2016

(11months) 2,308,979 865,831 2,310,734 - 5,485,544 -17,41% 3,567,687 1,917,857

Top Cement Exporting Countries

• Below are the 15 countries that exported the highest dollar value worth of cement during 2015: • China: US$776.2 million (8% of total cement exports) • Thailand: $658.9 million (6.8%) • United Arab Emirates: $650.7 million (6.7%) • Turkey: $550.9 million (5.7%) • Germany: $510.6 million (5.2%) • Spain: $489.2 million (5%) • Japan: $395.7 million (4.1%) • Vietnam: $378.7 million (3.9%) • Canada: $367.4 million (3.8%) • South Korea: $279.4 million (2.9%) • Greece: $250.4 million (2.6%) • United States: $249.4 million (2.6%) • Portugal: $222.3 million (2.3%) • India: $213 million (2.2%) • Pakistan: $197.9 million (2%)

• Among the above countries, the fastest-growing cement exporters since 2011 were: Greece (up

119%), United Arab Emirates (up 83.3%), Portugal (up 62%) and Spain (up 53.9%).

• Those countries that posted declines in their exported cement sales were led by: Pakistan (down -57.5%), Turkey (down -39.6%), Germany (down -32.4%) and South Korea (down -19.4%).

Market Share - Capacity

Lucky Cement Limited

16.19% 7.4 MT

Bestway Cement Limited 17.45% 7.96MT

D.G.Khan Cement Limited 9.25% 4.2MT

Fauji Cement

7.53% 3.4MT

Maple Leaf Cement 7.53%

3.37MT

Dewan Hattar Cement

6.35% 2.89MT

Market Share based of Operation Capacity of Cement

 Bestway Cement Limited - Chakwal, Hattar &Farooqia + PakCem Company Limited

 Lucky Cement Limited - Pezu & IndusHighway

 D.G.Khan Cement Limited - D.G.Khan &Chakwal

 Fauji Cement Company Limited - Fateh Jang

 Maple Leaf Cement Factory Limited -Daudkhel

 Dewan Hattar Cement Limited - Dhabeji &Hattar

Market Share – Dispatches

Lucky Cement 19.19% 6.79MT

Kohat 5.21%

1.85MT MLCF 8.36%

2.96MT

Fauji 7.29% 2.6MT

DGK 10.86% 3.86MT

Bestway 13.72% 4.87MT

Market Share 2015

Lucky Cement

Kohat

MLCF

Fauji

DGK

Bestway

Production Capacity & Future

44.64

44.64

45.62

45.62

47.3

47.3

51.1

53.4

40 42 44 46 48 50 52 54 56

2012-2013

2013-2014

2014-2015

2015-2016

2016-2017

2017-2018

2018-2019

2019-2020

Production Capacity

Plant by Cherat of 1.3 MT

DGKC capacity increase by 2.7 MT & Attock capacity increase by 1.1 MT

Lucky Cement Plant of 2.3 MT capacity

(In metric tonnes)

Industry Utilization

Industry SWOT Analysis

Strengths • Cement a Strong Industry

• Sustained Growth in Production

• Easy Availability of Production Resources

• Surplus Production for Local and Export Markets

• Good Local and Strong Industry Base

• International Reputation

Weaknesses • Cost of transport

• Lack of Professional Expertise within Industry

• Dependence on Cartelisation for adequate Revenue

• Lack of Research & Development

Cont. Opportunities • Future Growth Potential • Rising Demand • Emerging Export Markets • Construction Boom • Developing a Long Term Vision

and Strategy • Research to Develop New

Products • Focus on Cost Optimisation • Possible switch over to

Cement Roads • Conversion to Coal • Availability of Finance

Threats • Low Per Capita Consumption • High Incidence of Taxes • High Input Cost • Supply of Inferior Quality

Coal and High Cost of Imported Coal

Cement Manufacturing Process

Three types of processes: 1) Wet Process (Obsolete) -Poor kiln heating -Large water requirements 2) Semi-Wet Process - Suited for RM with extreme elasticity - Not much popular due to high fuel and energy consumption 3) Dry Process (Used in Pakistan) - Suitable for RM with low moisture - Low fuel and energy consumption - Less maintenance costs - Higher kiln efficiency - Most beneficial

Raw Materials

• The raw materials needed to produce cement (calcium carbonate, silica, alumina and iron ore) are generally extracted from limestone rock, chalk, clayey schist or clay.

• These raw materials are extracted from the quarry by blasting. They are then crushed and transported to the plant where they are stored and homogenized.

Manufacturing Cost Break up

• Fuel & Gas comprises around 64% of manufacturing cost; while

• Wages of production workers, plant manager and etc. (around 6%)

• RM (8%)

• Packaging (7%)

• Others (15%)

Energy Efficiency & Production

• Captive Power Plants (coal-based, FO-based, gas-based and dual-fuel)

• Waste Heat Recovery Systems (WHR)

• Tyre Derived Fuel (TDF)

• Refused Derived Fuel (RDF)

• Pakistan can import Sulphur Washing plants

Energy

• 60-70% is the cost of energy in production of cement

• Coal (USD 53.30/Ton – PKR 5,586)

• Gas (PKR 750/MMBTU)

• Oil Furnace (PKR 28,425 M.T)

• Electricity (USD 10 cents per unit – PKR 10.47)

• Average electricity consumption is in the range of 90-130 kWh per tonne of cement, depending on the technology and the age of the cement plant.

• Currently, around 90 percent of the cement industry’s coal requirement is met through imports from Indonesia and South Africa with the present volume being over three million tonnes per year.

• Hence, even a little fluctuations in the fuel and gas prices widely affects the sector.

• Constant rise of gas and electricity tariff casting a negative affect on the profitability of the sector.

Drivers & Concerns • Major driver for cement consumption is infrastructure development

and house-building projects. • PSDP (PKR 1,675bn – 2016)

• CPEC

• Construction Industry (growth of 13% year on year during 2015-16 )

• Concerns • The industry players fear that additional excise duty might dampen

the construction activities.

• The presence of cheap Iranian cement in Africa and capacity additions in the region are fueling competition.

• Iranian cement might make further inroads into local markets in view of the lax border checks on smuggling and the government’s indifference to under-invoicing.

• Volumes to Afghanistan, one of Pakistan’s biggest export markets declined because of reduced investments and increased competition from Iranian cement.

Factors Influencing Cement Industry

• There are certain factors that influence the cement industry. The factors include: • Economic scenario – Phases of growth in the economy are positively linked

to cement company growth. • Cost structure and competitiveness – There isn’t much that cement

companies can do regarding cost structure because the margins are less to begin with. Cost advantages are usually due to companies having access to a cheaper power source, a quality limestone reserve, or being close to bigger markets.

• Legal, regulatory, and environmental scenario – The cement industry is affected by regulatory norms. This is prominent in developed countries where environmental issues are more stringent. This adds to the companies’ costs.

• Technological advancement – A disruptive innovation can give the innovating company an advantage. For example, when companies moved from the wet manufacturing process to the dry manufacturing process, there was a cost savings of 5%–10% of the overall cost structure.

• Geographic advantages – It’s an advantage for companies to be near limestone mines or waterways. Ease of transportation is an advantage.

• Winter factor – Construction activities tend to decline

Taxes

Cement in Pakistan is subject to various taxes

• Corporate Income Tax - 31% of taxable income;

• Federal excise duty (FED) – Rs. 1 per KG

• Sales Tax 17% of the MRP

• Import Duty on Coal 6% 5%

• Gas Infrastructure Development Cess (GIDC) (Rs200 per mmbtu)

Major Export Regions

• Afghanistan (by road)

• India

• Sri Lanka (by sea)

• Sub-Saharan Africa (by sea) - Africa’s urban population is expected to rise to 865 million by 2050 thus could face housing shortage.

Global Scenario • PCA projects global cement consumption to record sustained growth during 2015-2018, but

at a less robust pace than previously expected. World cement consumption is expected to grow 2.2 percent in 2015, 3.7 percent in 2016, and remain near 4 percent growth during 2017-2018. World cement consumption grew an estimated 4.6 percent in 2014 from 4.0 billion metric tons in 2013 to 4.3 billion metric tons.

• World demand for cement is projected to rise 4.5% per year to 5.2bn MT in 2019. Gains will continue to be driven by healthy increases in construction activity in developing countries throughout the Asia/Pacific and Africa/Mideast regions, driven by economic growth and increasing per capita income levels.

• One of the global researches predicts that Chinese cement industry will continue to dominate the global market with more than half of the global cement production till 2019. North American industry will also contribute heavily as they are recovering from recessionary conditions that began in 2007.

• In terms of growth, India will have the fastest growth by 2019 with the rate of 8.0% per year. Many other developing countries in the Asia/Pacific region will post similarly strong growth, including Vietnam, Indonesia, and Pakistan.

• The Asia-Pacific region has the largest share of the global cement market in terms of consumption. Other countries such as Iran, Brazil, Indonesia, Turkey, Russia and Japan hold great potential for growth due to rapid urbanization and industrialization. European and North American countries are also having healthy growth due to steady demand for cement.

Regional and Associated Cement Market

Local Scenario • Real estate and builders are consuming 70% of cement while 30% is used in

infrastructure

• What makes the quality of Pakistani cement exquisite is the basic raw material and limestone they use and that makes other countries prefer our cement over other cement producers. But, its per capita cement consumption stills stands at 140 kgs which is one of the lowest the lowest in the world since global average per capita cement consumption is 500 kgs.

• UAE and South Africa were used to be the thriving markets for Pakistani cement exporters in last few years but they have started building up their own cement production capacities to establish their local cement industry, this has not only adversely affected Pakistani cement manufacturers in terms of exports but also significantly increased the global competition which has negatively impacted cement prices as well.

• It is expected that cement manufacturers in Pakistan will invest around $1 billion to increase production capacity over the next three years in view of ever growing demand within domestic market from development projects under the public sector development programme, China-Pakistan Economic Corridor and other housing schemes. Usually, industry starts planning to add more capacity whenever the capacity utilization touches 80-85 percent mark to cater the increase in demand.

Current News

• The Environmental Protection Agency (EPA) has issued directives to the Hazara and Kohat administrations to stop production at two cement plants in breach of EPA regulations on dust pollution. (24th June 2016 )

• Askari Cement Ltd is planning to install a waste heat recovery (WHR) plant for its 3500tpd clinker line at its Wah works in Rawalpindi, Punjab. (1st July 2016)

• At least three laborers died while working in a cement factory in DG Khan late on Saturday when they became trapped in the furnace. (July 3rd, 2016)

• Poineer Cement installing new production line with approx. capacity of 7000 tons clinker per day. (4th July 2016)

PSX-100 Snapshot CEMENT

SYMBOL LDCP OPEN HIGH LOW CURRENT CHANGE VOLUME

Attock Cement 238.71 239.90 241.00 239.00 240.22 1.51 4,900

Bestway Cement 173.68 179.99 179.99 176.25 176.62 2.94 600

Cherat Cement 119.57 119.25 120.40 118.50 120.17 0.60 165,800

D.G.K.Cement 190.49 189.01 192.49 188.02 191.05 0.56 1,383,900

Dandot Cement 9.25 9.75 9.75 9.75 9.75 0.50 10,000

Dewan Cement 14.48 14.64 14.65 14.30 14.60 0.12 2,424,000

Fauji Cement 35.80 35.81 35.85 35.60 35.80 0.00 511,000

Fecto Cement 115.50 114.30 118.97 114.25 117.75 2.25 63,300

Gharibwal Cemen 47.50 45.19 46.15 45.19 46.15 -1.35 1,000

Javedan Corp. 29.47 29.49 29.50 29.49 29.50 0.03 11,000

Kohat Cement 261.92 262.00 266.00 262.00 265.03 3.11 48,400

Lucky Cement 648.51 646.00 656.00 640.30 644.71 -3.80 167,750

MapleLeafCement 105.51 105.36 106.00 104.52 105.33 -0.18 732,000

Pakcem Ltd 17.66 17.60 17.90 17.60 17.88 0.22 37,500

Pioneer Cement 107.40 108.49 109.00 107.90 108.62 1.22 213,800

Power Cement Ltd. 10.43 10.43 10.54 10.40 10.52 0.09 177,500

Safe Mix Con.Ltd 8.50 8.60 8.78 8.60 8.61 0.11 36,500

Thatta Cement 29.50 29.50 29.50 29.50 29.50 0.00 1,000

Share Price Sensitivity Analysis

• Company’s share price is directly linked with the operational and financial performance of Company. • INCREASE IN DEMAND Increase Market price of bag Better

EPS Increase Share price

• INCREASE IN VARIABLE COST decrease GPM Lower profitability and EPS decrease Share price

• INCREASE IN FIXED COST Discount rate increase, rupee devaluation occurs and increase in inflation EPS falls share price decrease

• CHANGE IN GOVERNMENT POLICIES If policy change is +ve than share price will increases, otherwise vice versa

• GOODWILL The market share price can also vary with the investors’ sentiments towards the company which changes very quickly in response to the news and events and also because of investors’ following of the general market trend.