Note: Global economic growth rates may vary from those with the reader as various global organizations of the world estimated it differently.
World Economy
Global growth in 2015 remained about 2.9~3.1 (range quoted by various studies). The completed year was restrained and submissive.
From China to Australia, USA to Europe, Middle East to South East Asia all remain in fragile demand and passing through a phase of low interest rates.
Syria, Yemen and Iraq crisis and growing tensions in Middle East are yet unresolved. Last year many undesired events occurred in this region.
Its conflicts have involved many countries including world powers.
Europe has gone through a tough year in terms of politics, economics and terrorism.
Brexit, refugee crisis, terror attacks in Paris and Brussels and ailing economies all are highlights for last completed fiscal year which have definite upshots.
Oil prices have really shocked the world from lower side like they did some years back from the upper side.
Crude Oil touched lowest of about USD 26 but during the fiscal year achieved an average of about USD 42. Now it is trending upward.
Low oil prices have definitely put the oil export dependent countries in a trembling state whilst cocooning the oil importers.
Though still struggling, but positive signs ricocheted US Fed rate. LIBOR was at 30 years low level. Last two fiscal years trend clearly shows its bottom and rebounding.
Brexit is expected to bring in a tough fight between EU and UK for trade agreements with rest of the world and between themselves.
The expected stretched exit process may affect sentiments of stakeholders.
Emerging Asia and specifically India are expected to record good growth and same is expected for South Asia.
Domestic Economic Developments
Islamabad claimed that economy had grown at 4.71% in FY16 but this figure remained in much debate and doubts. As per Economic Survey of Pakistan (ESP) 2016, agriculture growth was negative 0.2%. This is a unique phenomenon at least in last thirteen years record. Agriculture sector accommodates about 44% of total labour force. Total cropped area also remained stagnant since FY14. Manufacturing and services sectors reported 5 and 5.7 percent growth respectively.
| Sector | Approximate Share in GDP (%) | Approximate Growth (%) |
|---|---|---|
| Agriculture | 20 | -0.19 |
| Industrial | 21 | 6.80 |
| Manufacturing | 14 | 5.00 |
| LSM | 11 | 4.61 |
| Construction | 3 | 13.10 |
| Services | 59 | 5.71 |
Per capital income increased from USD 1516 to USD 1560. Tax revenues growth rate was 8.4% as compared to 11% of last year.
Exports decreased by 9.1%. Imports reduced by 5.2%. Workers’ remittances grow by 5.7%. Inflation reduced from 4.5% to about 2.8%.
As per last reported figures debt and liabilities of government reached about 73% of GDP at PKR 21,619 billion.
South Asia Growth in 2016
| Country | % |
|---|---|
| India | 7.5 |
| Sri Lanka | 5.0 |
| Bangladesh | 6.6 |
This year government published an annexure to ESP explaining the impacts of war in Afghanistan on Pakistan
which states that Pakistan has suffered about PKR 9,869 billion over a period of 14 years from 2001 due to war in Afghanistan and terrorist attacks. Despite issues of running war against terrorism Pakistan economy stood fast.
CPEC is the one thing Pakistan seems to completely relying on for its future for politico-economics matters.
About 2400 km long CPEC road is expected to link Gawadar and Kashghar and Karachi Lahore motorway.
It is expected to boast infrastructure including of roads, railways, oil and gas pipelines. It includes heavy expenditure on energy sector as well.
It is $45bn of investment of which $33bn in energy projects. Risks to it are mostly of domestic origin.
Yet a well-thought strategic configuration and consolidation with its fiscal designs & impacts not made public by the government.
Electricity situation improved. But still energy crisis is there and power plants are underutilized.
During the year voluntary tax scheme met with failure for registering the traders and resolution of withholding tax issues on bank withdrawals.
Tax laws are being made more and more complex. All corporates have been burdened with acting as a withholding agent on behalf of government without any compensation.
About more than 65% surge is reported in housing loans on YOY basis. However, the number of borrowers fell by more than 6%.
These and other facts show that more financing is routed to high end customers or areas.
Overall advances to private sector increased by about 11% as compared to last year.
Whereas decrease in benchmark lending rates is about 14% within FY16 and for two years (FY15 & FY16) the cumulative decline is about 40%.
Therefore, low interest rates even, could not attract the desired credit off-take which shows low economic activity.
Pakistan showed its intentions of now going alone without any further assistance from IMF.
Privatisation of some entities is on cards. Low inflation rates lead to cutting discount rates.
During FY16 Moody's Investors Service says Pakistan's B3 issuer rating balances strengthening growth and progress on structural reforms against a relatively high government debt burden and political risks.
It looks at the country's credit profile in terms of Economic Strength [assessed as "Moderate"]; Institutional Strength ["Very Low "]; Fiscal Strength ["Very Low (-)"]; and Susceptibility to Event Risk ["High"].”
Recently JP Morgan announced inclusion of Sukuk in its emerging market indices in which it will include a Pakistan’s sukuk of USD 1 billion.
Economic growth during the last completed fiscal year is not though impressive but better.
Most benefits which this government reaped are procured through international oil & commodity prices decline and increased workers’ remittances.
This international low price phase could have been better reaped however.
Domestic Cement Industry
In the economic survey of Pakistan for 2016 government marked cement sector as one of those contributed to growth in LSM. Construction sector reported growth of 13.10%.
Cement consumption is a reflection of the demand for housing, infrastructure and is related to a country's level of urbanization.
Pakistan is sixth most populace country in the world. Its average density is about 222/km2.
Pakistan per capita cement consumption is about 169 kg which far less than world average of 400 kg.
During the year local sales surge by 17% (FY15: 8%) while exports declined by about 18% (FY15: 12%).
This puts the total growth of cement industry at about 10% (FY15: 3%).
Industry total overall utilization recorded at about 85% (FY15:78%). Of this 72% (FY15:62%) is utilized in local market and 13% (FY15:16%) in exports.
Five cement players including us have announced expansions of about 11.35 million tons per annum. This expansion is expected to come on line between FY17 and FY19.
This additional capacity will take the industry rated capacity of cement production from 45.6 million tons p.a. to 56.9 million tons p.a.
The Company’s Performance
This is actually a marvelous year for the Company. Prices though reduced but production and dispatch outnumbered some previous years.
We produced 13% more clinker than last year, operated at 104% for cement production and sold 5% more than our capacity.
This shows that the Company is far better in utilization than Industry.
The Company earned PKR 20.06 (FY15: 17.40) per share, double than the face value of each share.
This 15% increase is mainly contributed by PKR 68 from sales netted off by PKR 48 COGS and tax. All other costs are covered by other income.
The Company GP margin for completed year is 42.65% (FY15: 36.22%) while EBITDA to Sales is 48.76% (FY15: 44.86%).
The Company gives a return of about 19% on pre-tax basis with 79% equity financed assets.
Prospects & Perspective
For upcoming year global is expected to be slightly better with gradual pace. Oil price rise is expected but it would not go beyond USD70.
Rising oil prices will help USD in gaining strength against other currencies.
Further, due to Brexit and prolonged exit process and the uncertainty it brings, USD may get lift.
These inclusive factors may lead to postponement of Fed rate hike but sentiments show that rate would go upward sooner or later.
Recently government of Pakistan introduced withholding tax on real estate transactions.
Law for prohibiting holding properties in others names, is also on tables.
These laws are not expected to cast any material impact on construction sector and specifically cement.
If government simplifies the tax laws and tightens its grip, that would be more advantageous for revenue increase and expansion of base.
Given the facts I discussed in the economy and industry sections, I am of the view that Pakistan’s economy can perform far better and it has an immense capability provided it is organized with sincerity, consistent policies and precision.
Agriculture sector has a remarkable impact on Pakistan.
Provided this year had it performed well it would have give more positivity to construction and cement.
Urbanisation is at high pace in Pakistan. Though it should be properly managed and planned.
A huge cushion is available in per capita cement consumption. Huge infrastructure is expected to be built in coming years owing to CPEC.
All these factors lead to one point that cement demand is going to increase further. Exports prices are expected to remain in tight grip.
Government has announced some measures for uplift of agriculture sector which if successful will give boost to this sector and also bring in the demand for cement.
Housing mortgage loans market is still not fully developed.
If lending institutions open and widen the windows for secure housing loans it would be a plus factor for cement demand.
We are in an interweaved world. Impacts of others affect us and vice versa.
Euro area, UK, USA are very much linked to Pakistan export sector and agriculture sector employs the most the Pakistan’s population.
Improvement in these regions and sectors would bring more activity to construction area.
Proposed expansions by cement players may not disturb largely, the industry as if industry utilization is projected to increase by 10%p.a. on YOY basis then it is expected that it will absorb market demand.
Coal prices are expected to remain in a range bound position. Benchmark lending rates in the country may not change considerably.
Banks liquidity position may spill. These may cause the lending rates subdued.
The Company’s lending level, of long term loans, could grow in FY17 along with the Hub project progress.
The Company has already negotiated fine deals with lenders for this project.
As far as EUR is concerned, it may remain in pressure while USD may get appreciation of about 5% for the year.
But the markets may move in most unpredictable and unusually rapid way.
Exchange rate movements are crucial for upcoming year as most of the project shipments, denominated in Euro, are expected to realize in the forthcoming year.
Inflation level in the country is expected to not act ruthlessly but will increase in modest way in response to oil prices upward trend.
Therefore, it could be expected that margins may dwindle due to oil, coal and inflation rise but increase in sales in quantitative terms would mitigate that effect.
The Hub project would be a huge addition to our fleet with copious benefits to all stakeholders.
I am profoundly thankful to my team and all stakeholders for their endeavors and trust.
Raza Mansha
Chief Executive Officer
Lahore
August 31, 2016