Low Cement Capacity Utilization Leads to Potential Growth Ahead
Staff Report
Islamabad: Currently, cement sector is running on historical low utilization level of 55% versus last 30-year average utilization of 76%.
The main reason for this significant decline is that although capacity has increased sharply, demand has remained subdued over the past few years.
To note, cement capacity in Pakistan has increased to 84.6mn tons as compared to 9mn tons in FY92, (up 9x) during the years.
Historically, we have observed that capacity expansions have only been undertaken when utilization surpasses 80%, therefore, we do not expect any capacity expansion in the near term.
Cement Profitability Rises 7% QoQ in 2QFY25
Furthermore, the pause in expansion is expected to enhance the liquidity of companies, which could enable them to increase their payout going forward.
Local Dispatches recorded at 8-Year Low in FY25 During FY25, local dispatches arrived at 37mn tons compared to 38.2mn tons during FY24.
Thus, during last 4 years, cement sales posted consistent decline on annualized basis reaching at 8 – year low level in FY25.
onsistent decline in local sales during last 4 years is due to the fact that per bag cement prices have increased by 2.2x which led to lower construction activities while government’s weak fiscal position led to lower public sector spending over the last few years.
Cement Exports at 4-Year High, thanks to policy change in Egypt During FY25, exports increased sharply to 9.2mn tons (up 29%YoY) from which major increase is witnessed in seaborne exports as it has become more viable due to better export margins, thanks to 1) Policy change in Egypt 2) Multi year low coal prices and 2) Upward revision in export prices for both cement and clinker.
Just to recall, during FY25 Egypt withdrew export subsidy under the export subsidy program – inline with the directives of IMF which prompted regional players including Pakistan to penetrate into African markets as Africa was a major cement export destination of Egypt.
Record profitability likely in FY25, despite historic low utilization and 8-year low volumes Despite lowest utilization level, cement sector is expected to post record profitability during FY25 – thanks to 1) Record increase in cement prices (up 22%) in last 2 years and 2) Cost efficiencies implemented at the plant level.
Moreover, cement manufacturers have successfully passed on cost pressures to end consumers, thus no compromise on margins. Thus, during FY25, it is anticipated that total earnings of our sample companies to remain around Rs113bn (up 50%YoY).
For FY26, we expect cement earnings to grow by 16%YoY, mainly driven by 1) Expected rise in Volumes (up 6%YoY) 2) Lower Finance costs and 3) Subdued coal prices. We have assumed cement capacity utilization of 57% during FY26 compared to 55% in FY25,” Sherman Research said.
Thus, based on our working, if the industry achieves 60% capacity utilization in FY26 (sales growth of 11%), earnings of our sample companies will increase by 28%YoY.
Moreover, if cement sector gradually achieves historic average capacity utilization of 75% within next 3 years, average annualized earning will improve by 22%. We maintain our “Over-Weight” stance on cement sector. Our top picks include DGKC and MLCF as they are trading on FY26 PE of 6.2x and 6.8x, respectively,” Sherman said.
