Cement: Crowding at the top

DG Khan Cement (PSX: DGKC) has decided that it will not fade quietly and wither into the night. Ringing in the new year, the company announced a brownfield expansion at its Mauza Khofli Sattai, DG Khan site adding a clinker production line of 11,000 tons per day (roughly 3.3mn tons). The timing is telling.

The cement industry is only just emerging from a prolonged demand slump, with utilization hovering below 60 percent for the past three years. Demand is recovering with cement offtake up 12 percent year on year, in the first five months of the fiscal year, volumes still well below the FY21 peak. In a market still grappling with excess capacity, DG Khan’s decision to expand almost looks like defiance, rather than opportunism.

For better or for worse, the industry is consolidating and DGKC’s move fits neatly into the broader pattern that is reshaping the industry. Fauji’s absoroption of Askari and expected takeover of Attock (the deal is still in the works), followed by Mapeleaf’s bid for Pioneer have tightened market control at the top.

By 2025, the four largest producers already accounted for more than half of the country’s total production capacity. If all these acquisitions successfully happen, this figure is set to approach two-thirds, pushing the industry closer to an oligopoly where pricing power is concentrated and uncontested. In such an environment, companies are competing for more territory. As the industry has seen in the past, the route to scale is either to buy or to build. DG Khan’s expansion will strengthen its existing position by securing the fifth spot at least; fourth if Fauji decides to not acquire Attock.

With an expansion that comes online in 2-3 years, the only risk is that of collective action. Other companies with strong fundamentals and sizeable cash may expand as well to secure a better position in the market which could trigger another wave of expansion, which in turn would prolong under-utilization. The sector has a habit of expanding together and typically these expansions end in the same way: supply racing ahead of demand. Since FY21, new plants came online as domestic construction faltered under floods, fiscal tightening and political disruption. Exports provided some relief but just. Capacity utilization dropped to 53 percent in FY24, recovering only slightly in FY25.

In FY26, domestic demand is expected to grow upwards of 10 percent (in 5MFY25, domestic offtake is up 15%) supported by an expected recovery in housing demand owing to the government’s mark-up subsidy, and renewed development spending. If these recoveries materialize and sustain over the next few years, early movers will have the advantage. Until the tide turns.

While underutilization should trigger price competition, a price war appears unlikely. As the industry tilts towards an oligopoly and power concentrates at the top, firms that are expanding and consolidating have the least incentive to undercut prices since aggressive pricing would undermine the economics of their capital-intensive investments and weaken returns on new capacity.

For now, it is clear that DG Khan Cement does not want to be left behind. Whether this is a growth story, or a prelude to yet another glut will depend on how demand performs in coming years. And that, friends, is never a given.