The development plans of cement businesses, along with a rise in global coal costs, in the context of a deteriorating macroeconomic scenario in Pakistan, may push the sector into a price war, according to analysts.
Cedar Capital analyst Ali Shah Khawaja stated in a research published on Saturday that major participants in the sector have indicated ambitions to expand significantly.
“When we look at prior expansionary cycles, it is apparent that the industry will have to wait an extended length of time before reaping the benefits of its investment,” he said. “However, the sector has fallen short of the anticipated gains this time around,” says the report.
As a result of the low earnings and bleak macroeconomic prospects, he believes that the sector is at risk from early expansion plans.
There is just one scenario that would be in conflict with the forecast: if players decide to forego their expansionary plans completely. However, given the current dynamics, this appears to be a far-fetched notion given that significant players have already begun implementing their expansionary plans.
He believed that concessionary funding, which had been obtained by five main industry participants, had been a blessing in disguise because it had expedited expansion plans.
“Demand for cement has been increasing at a consistent rate for the previous three decades,” the survey stated in conclusion.
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Tahir Abbas, the Head of Research at Arif Habib Limited, stated in an interview with The Express Tribune that in the past, price wars had erupted close to the start of commercial operations for new construction projects.
As of now, domestic demand remains strong, and local players are already trying to keep margins afloat, so a pricing war is unlikely to occur in the near future, according to the analyst. The possibility of a price war after the new capacity is put into service and utilization begins to decline cannot be discounted.”
It was revealed that many manufacturing plants have taken advantage of the State Bank of Pakistan’s Temporary Economic Refinance Facility (TERF) or Long Term Financing Facility (LTFF) in order to import machinery for their upcoming expansions in order to take advantage of low-cost financing schemes, according to the official.
These projects, which are slated to come online between 2023 and 2025, will increase the total capacity of the industry by an additional 30 million tonnes when they are completed.
According to Taurus Securities analyst Mustajab Ali Kazmi, the cement sector’s margins have shrunk as a result of the rising price of coal on the worldwide market.
The price of coal on the international market had been hovering at $80 per tonne in the fiscal year 2020-21, but it has already risen to more than $200 per tonne in recent months.
“The demand for cement is still high as a result of the incentives provided to the real estate sector,” he explained.