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Brief review on auto, cement and energy sectors

Automotive assemblers/manufacturers

The automobile industry in Pakistan includes companies involved within the production/assembling of passenger cars, light commercial vehicles, trucks, buses, tractors and motorcycles. The current market structure of the industry is concentrated. It is largely dominated by Japanese players: Toyota, Suzuki and Honda. The three players have deep rooted presence in Pakistan. FAW is a new addition to the sector. In Pakistani market, Suzuki Motors enjoys largest share of over 55% followed by Toyota (25%) & Honda (20%).

New assemblers have already started their production activities, especially within the car segment. However, these newcomers as well as the incumbents face a testing period as the economy is going through a low economic growth phase. In order to integrate these entrants in the domestic market and also to insulate the automobile industry from the excessive effects of economic cycles and import compression, a number of structural improvements are needed. These include:

(i) Increasing the localization content in automobile assembling;

(ii) Providing a level-playing field in the sector by doing away with protective policies; and

(iii) Addressing market frictions in the auto financing business.

With new assemblers starting production and existing ones unwilling to reduce the prices despite low demand, the margins are expected to remain under pressure. The outlook remains tenuous to negative.

Cement

Pakistan’s cement industry is split in two regions: North and South. North comprises of KPK, AJ&K and Punjab. South region comprises of Sindh and Balochistan. In the North zone there are 13 listed companies whereas the Southern zone has 6 listed companies. The total installed capacity of the North Region as on January 2020 is 53.127 million tons per annum whereas, the total installed capacity of the South is 16.404 million tons per annum. Both regions have their own demand and supply dynamics. Players of the Southern region, benefit from greater export market availability given their geographical proximity to the sea; providing room for revenue diversification. Local demand growth in Northern region remained higher due to China-Pakistan Economic Corridor (CPEC) and other government related infrastructure projects.

The profit margins of the Pakistani cement industry remain under pressure in FY20 and this trend is likely to continue in FY21 on the back of poor demand, higher coal prices and interest rates, lesser allocation for development projects, and competition in local and overseas markets. Profitability for several companies is predicted to be slashed due to higher finance costs (as a share of revenue), led by increased expansion-led borrowing. If industry is able to explore the overseas markets more, revenues would continue to grow, but margins may not improve as cost pressures coupled with price competition — both locally and globally — may affect the profitability.

Petroleum Refinery

Pakistan majorly depends on oil and gas to meet its fuel demand. Imported LNG has emerged as an important fuel for the country needs, specifically for the power sector. Pakistan oil sector is split into upstream, midstream and downstream categories. Refining and production make up the midstream oil sector. As many as 8 oil refineries are currently operating in the country: Pakistan Refinery, National Refinery, PARCO, Attock Refinery, Byco-I and II, ENAR Petroleum Refining Facility (ENAR¬I) and ENAR Petroleum Refining Facility (ENAR-II). Meanwhile, 6 petroleum refinery projects are currently at different stages of completion to build up petroleum refining capacity in Pakistan. The government in a bid to satisfy the ever-growing energy requirements of the country, is making all-out efforts to upgrade the prevailing oil refineries and establish new deep conversion facilities to meet the country’s fuel requirements.

Although planners forecast a 10 % year-on-year growth in demand for the next 5 years, currently due to the rapidly evolving fuel mix of the country there has been a precipitous fall in the demand for furnace oil. The entire industry is in a catastrophic situation, and it is feared that some players may go out of business. Outlook remains negative.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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