Cement Sector
According to post budgetary measures, retention for cement manufacturers has increased by an average of 7 per cent MoM in July to Rs5,300/tonne. Though industrys’ dispatches are likely to depict a MoM decline in July owing to the start of the Monsoon season, industry reports suggest a slight improvement on a YoY basis. The domestic demand is expected to recover by 6 per cent in FY12 on the back of higher Public Sector Development Programme (PSDP) spending and more suitable weather conditions this year. Upon expectation of growth in sales, rising retention prices and stable international coal prices, the sector is seen as over-weighted.
Retention on the rise
Retention prices for cement manufactures have risen by an average of 7 per cent MoM on post budgetary measures, said Atif Zafar at JS, adding that while retention in North has so far averaged around Rs5,300/ tonne in July versus Rs4,965/tonne in June, it has augmented up to Rs5,350 by July 15th. This jump is primarily due to the manufacturers not fully passing on the reduction in FED of Rs200/ton, removal of 2.5% SED and cut in GST of 1ppt to the consumer. From sensitivity point of view, for every increase of Rs100/ton in retention, LUCK and DGKC’s earnings in FY12 should improve by Rs1.1/share (8 per cent) and Rs0.5/share (26 per cent), respectively.
Dispatches to decline in July
On the one hand it is anticipated that the domestic dispatches are to decline by 5-7 per cent MoM (versus a decline of 16 per cent MoM last year) due to start of the monsoon season, industry reports suggest a slight improvement of 6-8 per cent on a YoY basis on the other. We expect this improvement on the back of purchases delayed until July 1st in anticipation of a fall in prices, inclement weather and some reconstruction activities in flood hit areas, he added.
Coal prices fall
After peaking at free on board value of $130/tonne in Jan 2011, coal prices have since then fallen to $115/tonne versus FY12 assumptions of $120/ton. Hence, coal prices at these levels are likely to pose an imminent risk to our earning estimates. As per the sensitivity analysis, a $5/tonne differential from our assumption of coal prices results in an earnings impact of 7 per cent and 21 per cent for LUCK and DGKC cement, respectively. Local dispatches are expected to rise by 6 per cent in FY12 on the back of higher PSDP spending and reconstruction activities in the flood hit areas, resulting in a rise of 5 in overall dispatches. Moreover, margin expansion for cement companies in FY12 are also on cards owing to rising retention prices and lower international coal prices.
With cotton prices declining sharply, the ginning and spinning sector seem to be in murky waters as their margins have squeezed substantially due to expensive cotton and yarn inventories. This has caused many spinning units across Pakistan to halt their operations and payments to the ginners. However, weaving, composite and other value added units (like NML and NCL) will benefit from lower yarn prices.
Cotton prices decline
Cotton prices, both in international markets and in local markets have witnessed a massive decline as international cotton prices have reached to $1.49 per pound whereas the domestic cotton prices have trenched to an 18 months low at Rs 6,200 per maund. In March 2011, cotton price were at Rs13,000 per maund, which due to enhanced production and slump in the international markets came reeling down to less than half. During FY11, drought in China, floods in Pakistan and export controls in India caused a global shortage of cotton, which led to an unprecedented price hike to a level of $2.29 per pound. However cotton prices started to decline with a forecast of a better output in FY12 as major cotton producing countries have increased their acreage under cultivation this year. World cotton area in 2011/12 is forecasted at 35.6 million hectares, up by 6 per cent from a year earlier.
Global demand and supply of cotton
World cotton output is forecasted to reach 123.8million bales in FY12 as compared to 113.9million bales in FY11 depicting a rise of 7.5 per cent YoY. On the other hand world cotton consumption is also expected to rise from 115.5million bales in FY11 to 119.5million bales in FY12 mainly on the back of healthy demand from China and India. In Pakistan cotton production is being targeted at 15.2 million bales for FY12 against last year’s production of 11.7mn bales, which was ravaged by floods. The expected jump in cotton output is mainly because of an anticipated 8 per cent YoY increase in the area under cultivation, coupled with higher usage of BT Cotton Seeds.
Textile exports
During FY11 Pakistan’s total exports registered a 29 per cent YoY growth, of which both textile and non-textile sector posted a positive growth. Of the total exports, a lion share came from the textile and food sectors contributing almost 61 per cent and 18 per cent. High growth particularly in textile products was an important factor in rising commodity prices such as that of cotton which rose by 106 per cent during the year. In FY12 as the prices of cotton in particular ease off to ($1.49/lb) we might not witness the same robust growth in cotton related exports, said Usman Saeed at AHL. However higher cotton production (almost 15.2-16.5mn bales) could mitigate the impact of decline in cotton prices, he added.
