Cement

Being the second of the ongoing pandemic expansion cycle (first in the south region), Lucky Cement (LUCK) has successfully commissioned its brownfield expansion of 1.30 million tons per annum (mtpa) at Karachi plant. This would be followed by a 1.2mtpa brownfield expansion of by ACPL and 2.8 mtpa greenfield expansion by DGKC at Hub, Balochistan. Post completion of the first expansionary phase (5.3 mtpa) in South, capacity utilization in the region/total industry is expected to drop at 57%/82% by 1QFY19 from 93%/86% in FY17, assuming demand growth of 8%. Consequently, this is likely to create significant supply side pressures, exert pricing pressure in the short term, where the prices have so far remained stable. As against this in the North region cement prices have declined by 6.5% since June 2017. Out of the ten announced expansions in North (totaling 19.6mtpa), only 5 have been able to achieve financial close for 9.30mtpa). Analysts see the pace of expansion to be gradual in North with additions coming online in a phased manner — the first expansion is expected to commence commercial production in 4QFY19. This should allow prices in the North region to stabilize at current levels as capacity utilization is anticipated to hover around 90% in the medium term. In the North region, the first expansion by MLCF (2.20mtpa) will be followed by 4 expansions of cumulative 7.10mtpa, likely to commence commercial production by the end FY20. Despite these supply additions (totaling 9.30mtpa), analysts see capacity utilization of North to settle around a comfortable level of 85% by the end of FY20 against 84% in FY17. In this backdrop, analysts expect prices in the North region to stabilize at current levels. Furthermore, the remaining additions also pose no significant threat in our view as they currently stand at very initial stages with completion likely to take time. Assuming these units come online by FY22, capacity utilization of North region would still remain above 82% by the end of FY22.