AKD Quotidian about — Cements: Numbers encourage but coal worries!

Karachi, December 06, 2012 (PPI-OT): As per the latest numbers released by the All Pakistan Cement Manufacturers’ Association (APCMA), overall cement dispatches in 5MFY13 (Jul’12 – Nov’12) depicted an increase of 3.4%YoY to stand at 13.1 million tons.

According to AKD Securities, volumes on the local front increased an encouraging 6. 8%YoY to 9.5 million tons while exports disappointed with a cumulative 5MFY13 decline of 4.4%YoY to 3.6 million tons. In Nov’12 alone, local dispatches increased by an astounding 19.6%YoY to 1.96tons (low base as Eid-ul-Adha occurred in Nov’11) while exports increased by 11 .7%YoY to 689.2k tons. Growth in exports was led by a 27.7%YoY growth in Afghan exports (low base due to Eid-ul-Adha), Pakistan’s biggest individual export market. While volumes impressed in Nov’12, price movement in cement stocks could potentially remain sluggish in the short term due to upward movement in coal prices following the onset of early and harsh winter in Northern China. As of Friday, Nov 30’12, Richards Bay coal (FOB) stood at US$89.8 per ton while Newcastle stood at US$87.1 per ton. To counter coal cost rises, manufacturers have already increased per bag cement prices in the PKR 5- PKR 10 range. While the adverse coal movement will have negligible (even zero) impact on 2QFY13 results, 3QFY13 results could potentially come in on the lower end of the spectrum should coal costs continue to rise. That said, AKD Securities maintains AKD Securities’ current coal estimates at an average of US$89 per ton for full year FY13 and maintain AKD Securities’ `Overweight’ stance on the Cement sector. Long term fundamentals remain intact though volatility could be witnessed in the short run.

Numbers on the up! Local cement numbers have clocked in an encouraging 6.8%YoY growth to 9.5 million tons in 5MFY13 with Nov’12 local sales particularly impressive at 1.96 million tons, an increase of 19.6%YoY. Note that the YoY growth in Nov’12 numbers also incorporates a low base as Eid-ul-Adha occurred in the month of November last year. While cumulative 5MFY13 exports decreased by 4.4%YoY to 3.6 million tons, Nov’12 numbers alone surprised with an increase of 11.7%YoY to 689.2k tons on the back of improved Afghan exports (up 27.8%YoY in Nov’12).

Coal climbs – Reason to worry? Not really! A recent uptrend in coal prices has been witnessed where last quoted FOB Richards Bay (Friday, Nov 30’12) stood at US$89.8 per ton, up from a low of US$79.8 witnessed at the beginning of Nov’12. At the same time, Newcastle Coal FOB has rebounded to US$87.1 per ton. The upward movement in coal has come on the back of increased demand particularly from China due to the harsh and early onset of winter in the Northern parts of the country. While coal price is likely to further increase in the short run, AKD Securities mains bearish on the long term prospects of the commodity particularly given waning demand in developed economies following production of cheaper (and comparatively environmentally friendlier) shale gas. Currently, AKD Securities maintains AKD Securities’ full year FY13 coal price forecast at an average of US$89 per ton.

Investment Perspective: In recent weeks, manufacturers have increased prices in the PKR 5- PKR 1O per bag range following the reversal in coal prices. AKD Securities believes coal prices will likely inch higher till Jan’13-Feb’13 before coming down again. 3QFY13 cement universe results could potentially be on the lower side QoQ as a consequence. While short term volatility is likely, fundamentals remain strong in the long term where AKD Securities has an `Overweight’ stance on the Cement sector.