Karachi: As per news reports, the Qatari Environment Ministry has decided to stop operations at 14 gravel crushing quarries, which should lead to severe shortages in building materials, leading to increase in cement prices.
According to AKD Securities, in the backdrop of prevalent cement shortage in Kingdom of Saudi Arabia (KSA), growing cement demand in GCC states and comparatively low export prices of Pakistani cement, AKD Securities expects a revival in Pakistan% sea exports, at least for the next 18-20 months. While the local cement sector is already on the growth path, a revival of sea exports should provide additional impetus. In this regard, AKD Securities’ preferred pick remains LUCK (FY12F PER: 6.3x) which should gain the most from potential Qatar cement demand given its leadership in sea exports. DGKC, on the other hand, should benefit from higher dispatches to Afghanistan and India, in tandem with higher cement prices on the local front. Smaller cement scrips (expected to benefit from higher cement prices) include ACPL, CHCC, LPCL and DCL where these may be considered for investment in 2HFY12. Within AKD Securities’ coverage universe, AKD Securities has a Buy stance on DGKC and an Accumulate on LUCK, offering respective upsides of 21% and 16% to AKD Securities’ target prices of PkR34/share and PkR113/share.
Growing demand in GCC states: As per news reports, GCC cement demand is expected to reach 88mn tons in 2013, up 6.6% from 82.5mn tons in 2011. In this regard, KSA has announced expenditures of SR690bn in 2012 budget. These expenditure are reported to be focused on education, healthcare, water and sewage services and transportation, including construction of 742 new schools, 17 new hospitals, 4,200 km long roads and expansion of 6 airports, all leading to a surge in the country’s cement demand. Oman and Qatar should also continue to report high cement demand on the back of increasing government projects in Oman and expected start of projects and contracts related to infrastructure development in Qatar, ahead of the 2022 football world cup.
But what is the supply situation? While news reports suggest an increase in GCC cement capacity to 120.7mn tons by 2013, up 13% from 106.8mn tons in 2011, the recent cement crisis in KSA (due to gas shortage in certain regions) has led to increase in retail cement prices from US$96/ton- US$130/ton in different regions across the country. In the near-term, this makes UAE cement, with its low export prices, more attractive for the Saudi construction industry. Moving towards Qatar, the recent decision of the country’s Environmental Ministry to relocate limestone quarries should result in near-to-medium shortage of cement in Qatar and may hamper ongoing project. Given the ban imposed on cement export by KSA, Qatar may have to rely on cement imports in the near term.
So who gains – UAE or Pakistan? As per news reports, UAE is expected to witness an increase in oversupply where annual capacity may reach 43mn tons by 2013 (annual demand in the country may stay in the range of 18-20mn tons). However, UAE cement companies are already running into losses due to the oversupply situation, where they are compelled to sell cement at unsustainably low prices. This may ultimately make Pakistani cement more competitive for sale in the GCC region, as UAE cement price increase. Note that Pakistani cement prices for exports through sea stand in the range of US$55/ton-US$60/ton (FOB), and even adding a US$15/ton to US$20/ton freight, it still stands at a relatively low US$80/ton.
Investment Perspective: AKD Securities remains highly positive on the local cement sector with cement manufacturers to gain from 1) sustaining higher cement prices on the local front, 2) increase in export prices to Afghanistan, 3) low coal prices, 4) cost reduction measures started by cement manufacturers and 5) potential revival of sea exports on the back of increasing demand in GCC markets. While LUCK (FY12F PER: 6.3x) should benefit from a revival of sea exports AKD Securities also likes DGKC (FY12F PER: 13.1x) which should benefit from increasing exports to Afghanistan. Smaller cement scrips e.g. ACPL, CHCC, LPCL and DCL may also be considered for investment in 2HFY12.