Pakistan Stock Exchange inching closer to 50,000 mark

The benchmark index of Pakistan Stock Exchange (PSX) continued its upward journey towards 50,000 mark during the week ended 6^th January 2017. It posted a gain of 2.58%WoW, and closed the week at 49,038. Exercising of pricing power by cements, expectations of turnaround in margins for steels, expectations of the textile policy and the Supreme Court's move to re‐examine beneficial owners of holding companies, helped boost a broad based rally where average volumes for the week were up 42.3%WoW, 408 million shares. Key new flows included: 1) cement dispatches grew by 8.65%YoY to 19.81 million tons in 1HFY17, led by growing demand in the domestic market, while local cement sales increasing by 11.07%YoY during the period, 2) the GoP decided to keep petroleum prices unchanged for two weeks during the ongoing month, 3) domestic petroleum products sales during the 1HFY16 increased by more than 18% to 13 million tons. POL sales during December'16 rose to 2 million tons, reflecting a growth of 23% YoY/1.8%MoM and 4) news reports stated that KEL has shelved plans for converting its BQPS‐1, with 420MW capacity to low‐priced coal after the utility failed to secure cost‐effective tariffs from the regulator. Stocks outperforming over the week were: ASTL, FFC, NCL and PTC, while laggards were: MEBL, AGTL, EPCL and KEL. Volume leaders were: DSL, ASL, KEL and, BOP. News flows and preliminary data on output figures from OPEC nations is expected to greatly sway global oil prices. While the index is at all‐time highs, profit taking cannot be ruled out. In the run‐up to results season, dividend paying stocks are expected to remain in the limelight. 

Recent recovery in international urea price to US$240/ton (up 42% since July'16) presents a lucrative opportunity for local manufacturers to export excess urea inventory (November'16 urea inventory in the system stands reported at 1.45 million tons, down 15%MoM/ up 56%YoY). Weakening demand (poor farm dynamics) along with record level urea production has led to high inventory build‐up in the system which is likely to persist in the near‐term with urea inventory forecasted at 1.2 million to 1.8 million tons by the end of CY16/CY17 respectively. In this backdrop, the GoP is expected to allow export of 0.8 million tons of urea in line with a proposal of Ministry of Industries. In such a scenario, Engro fertilizer remains a key beneficiary on account of its low cost/bag and healthy market share, followed by FFC owing to market leadership in urea sales.  

Robust growth in demand for POL products, underpins December'16 total volumetric offtake of over 2 million tons, climbing 1.4%MoM/21.6%YoY. Furnace oil sales rose by 35.5% MoM/30.4%YoY, followed by HSD sales up 23.7%YoY but dipped 20%MoM, whereas MOGAS demand continued to rise (growing 16.7%YoY), yet remaining tepid sequentially (0.3%YoY increase). 1HFY17 volumes point to 18%YoY growth in total volumes, led by 20%/16%/20%YoY growth in FO/HSD/MOGAS offtake. The picking up of volumes at this pace is likely to slow. That said, 2HFY17 is likely to be slightly better (5-year average 2HFY sales make up 53% of annual offtake), led by strong growth in retail fuels from May’17 onwards. Premium fuels sales continue to soar, where 1HFY17 sales of 29,547 tons marks a 37%YoY increase, making FY16 full year sales of 41,067 tons pale in comparison. Renewed force to regain market share remains prominent in PSO's numbers, where the OMC is slated to benefit from its vast retail network.

According to an AKD Research report, cement prices in the North Region have likely been increased in the range of Rs10‐20/bag whereas the cement prices in the South Region remain unchanged and are not expected to be raised anytime soon. The brokerage house believes that the hike in cement prices (not incorporated in base estimates yet) should allow cement manufacturers to maintain margins whereas gross margin of AKD Cement Universe is likely to improve by 54 bps/100 bps to 38.76%/43.77% in FY17/FY18.

Pakistan Stock Exchange outperforms global equity markets

Inching towards another milestone of 48,000 level, benchmark of Index of Pakistan Stock Exchange (PSX) closed the week ended on 30^th December 2016 at an all‐time high of 47,807, up 2.52%WoW. Activity at the bourse tapered 15.06%WoW with average daily volume at 286 million shares. The volume leaders were DSL, BOP, KEL, DCL and TRG.

Key news flows during the week included: 1) Ogra recommended increase in POL prices, 2) CNG prices increased across Sindh, the first hike following the GoP’s decision to deregulate the country’s CNG market, 3) GoP rejected all the bids in PIB auction, 4) ECC of the cabinet approved export of 225,000 tons of sugar without any rebate and allocation of 26MMCFD gas to EFERT old plant and 5) Lahore High Court nullified the auction of DTH license carried out by PEMRA after striking down the rules and regulations which barred broadcasters from applying/participating in the bidding process.

Performance leaders during the week were: EFOODS, HCAR, FCCL, SHEL and SNGP; while laggards included: HMB, AICL, PSMC, POL and PTC. Foreign participation continued its negative trend with US$17.9 million outflows compared to US$45.5 million in the last week.

After a phenomenal end to the calendar year, PSX posted remarkable return of 45.7% in CY16, outperforming the world equity markets. The market is likely to continue its positive trend in the near term in the absence of any negative trigger. However, room for volatility in the next week remains where risk could emerge in the form of: 1) international oil price swings on potential concerns on the rising US inventories and 2) resumption of Panama leak case proceedings.  

Following its previous month performance, fertilizer offtake remained promising during November'16 as well on the arrival of Rabi season coupled with continued support from subsidy package announced in FY17 budget. After declining significantly during 5MCY16 (down 32%YoY), fertilizer offtake rose 28%YoY during June‐November 2016. According to latest figures released by NFDC for November'16, total fertilizer sales increased to 1.58 million tons against 1.32 million tons sold in November'15, up 20%YoY/68%MoM). Urea sales increased to 764,000 tons during November'16, up 23%YoY. On a cumulative basis, total fertilizer sales posted a growth of 3%YoY to 7.83 million tons during 11MCY16, whereas urea offtake was 4.59 million tons (down 4%YoY). On arrival of Rabi season, DAP sales continue to show great strength in November'16, registering an increase of 17%YoY/32%MoM to 631,000 tons, of which imported DAP sale was 421,000 tons (up 10%YoY/61%MoM). Near‐term factors affecting fertilizer industry are: 1) Rabi season to continue driving demand, 2) favorable ruling from SHC against GIDC imposition, 3) international pricing dynamics (urea prices rebounded to US$235/ton in December’16 and 4) decision on export of excess urea inventory.

Latest banking sector data for November'16 indicates that banks' balance sheet (BS) continues to grow at strong levels by 9%YoY to Rs12.3 trillion. With banks lowering their preference for risk‐ free GoP securities (investments down 9% since June'16, private sector credit growth picked up pace, posting an encouraging growth of 11.7%YoY during November’16. Consumer financing grew by a healthy 20.%YoY (10.3% of the private sector loans) as banks look to re‐focus on high margin auto finance and personal loans in the current lower inflationary environment. Expecting spreads to bottom out this year as interest rates rise next year, analysts retain their liking for banks due to: 1) the room to benefit from loan growth, 2) an adequate CAR buffer, 3) achieved economies of scale and 4) a strong non‐interest income franchise. Playing this theme, we like HBL and UBL however, post price‐bull run over the last 6 months.

According to provisional data, cement dispatches during December'16 declined by 0.8%YoY/8.9%MoM to 3.414 million tons. Weaker domestic demand growth during December'16 could be attributed to seasonal slowdown in construction activity and decline in PSDP expenditures in December'16. Exports also declined, likely due to the seasonality factor. While industry's dispatches growth remained dismal, CHCC dispatches were up to 119,000 tons in December'16, indicating the commencement of its 1.32 million tpa Brownfield expansion during the month. On a cumulative basis, industry's dispatches grew by 7.9%YoY in 6MFY17 as compared to 9.9% in 5MFY17 due to recent month's decline in dispatches. Seasonal slowdown in winters may keep dispatches growth rate lower, where we expect domestic demand growth to pick up ahead of summers as construction activity and PSDP releases increase.

US shale producers to gulp Saudi market share of oil

After OPEC lead by Saudi Arabia and Russia arrived at a consensus to contain oil production, I wrote that the real threat for Saudi Arabia was not Iran but the US shale producers. Some of my critics said that I suffer from US-phobia and try to portray whatever happens on the earth as part of US conspiracy.

This morning when I read a news from Reuters about increasing number of rig counts in the US, it gave me a feeling that I was not mislead by the western media but right in saying that with the hike in crude oil price, rig count in the US would jump dramatically.

According to the Baker Hughes, US energy companies have added oil rigs for an eighth week in a row as crude oil prices rose to a 17-month high. During the week ended 23^rd December 2016 the total rig count went up to 523, the most since December 2015.

The report also said that by May this year rig count had plunged to 316, from a record high of 1,609 in October 2014. This decline could be attributed to crude oil price that plunged to US$26/barrel in February 2016 from US$107/barrel in June 2014.

The report also indicated that oil and gas rigs count would average above 500 in 2016, around 750 in 2017 and above 900 in 2018. This confirms the news that while other oil producing countries curtailed fresh investment, US shale producers continued production without filing bankruptcy under Chapter 11.

The Reuters news should be an eye opener for oil producing countries, particularly Saudi Arabia, Iran and Iraq. They should not be the first to cut production and let the crude oil price go up. If they want to keep US shale producers under pressure, they will have to keep crude oil price below US$35/barrel. This may be pains taking but the only option to bring down the number of active rigs in the US. They should also keep an eye on E&P companies filing bankruptcy under Chapter 11.

In response to this I have received following response from Mark S. Christian, ​President, Chris Well Consulting.

I read your article, "US Shale Producers to Gulp Saudi Market Share of Oil". This article implies a skyrocketing North American rig count, but the U.S. did not add 523 rigs during the week ending December 23, 2016. In fact, the rig count in the U.S. is growing only modestly at the moment. Last week the U.S. added only 16 rigs in total - 13 rigs exploring for oil, and 3 rigs exploring for natural gas. This brings the total rig count to 523, but your article implied 523 rigs were added during this past week, and that is not correct. Maybe it was an editorial mistake by the publisher - which said: "During the week ended December 23, 2016 the total rig count went up by 523, the most since December 2015".It should have said ..."the total rig count went up to 523", implying the aggregate total reached this number.

I have been in the well-servicing business for more than 30 years and during this time operated workover rigs.​ A well service company provides well completion and maintenance services and​ demand for rigs go up and down with the oil price. When the oil price recently fell below $30USD/Bbl - my​ workover rigs were sitting idle. Oil companies could not afford to work on their wells, so they let them go offline. As prices moved above $45/Bbl, oil companies started calling again - and our workover rigs slowly began moving back into the field. The same holds true for American drilling rigs. Higher prices = higher U.S. rig utilization.

This supports your hypothesis that - 1) the U.S. rig count is a threat to the Saudi-led production cuts and 2) American shale may be a longer term threat to OPEC's market position.  Your warning to Iraq, Iran, and Saudi that raising prices via production cuts is not in their long-term interest, is correct, although I surely hope they do not change course.

Saudi guided OPEC into underestimating the staying power of shale-focused oil companies in the United States who were built on junk bonds and high-interest debt. Most were developing fields that were not economic below $60/bbl - and the Saudi's knew this. Riyadh miscalculated by expecting these financially weak companies to fold up quickly once prices fell below lifting costs. That did not happen, many went into Chapter 11 bankruptcy which allowed them to discharge their bond debt and emerge with a cleaner balance sheet.

El Naimi expected very steep decline curves for U.S. shale production, however, this did not materialize and North American shale production turned out to be more resilient than even the American oil companies forecasted. El Naimi also expected the shale market to collapse on itself as he viewed U.S. shale production to be inefficient. It was - until market forces went to work and held the unconventional resource market together much longer than the Kingdom's cash reserves or El Naimi's ideas were able to bear. 

In November 2014, the bottom fell out of the US oil market and caused U.S. service costs to deflate - my rig rates fell 30% in 60 days. What most outside the U.S. don't understand about the American market is when things are good we can ramp up drilling and well completion quickly​, but when things turn bad - cost cutting and a lazer-focus on efficiency enable us to sacrifice profits and survive until the market rebounds.

El Naimi's low-price strategy forced American E&P's to cut wasteful spending and exercise more discipline over their profit and loss. This helped​ U.S. production become more efficient - and lowered U.S. lifting costs. Now fields that were unprofitable when crude prices fell below $60/bbl are profitable at $45/bbl.

The big question that everyone wants to know, (and relate directly to your warnings to OPEC in your recent article) is: How long will it take the​ U.S. to ramp up production enough to offset OPEC's production cuts? Can American production actually grow large enough to begin driving global oil prices down? If that happens, OPEC will no longer be the swing producer we have relied on for so many years to correct bubbles in the market.

If the U.S adds 16 rigs per week over the next 52 weeks - the resulting increase of 832 new rigs in the next year will not affect America's oil production to an extent it will make a noticeable change to the global oil market. Over the years I have noticed that the U.S. market needs 2-3 years of booming exploration and development activity before the global market takes notice. I do agree with your assumption that production growth in the U.S. may swallow up Saudi's recent production cuts, but it will take 24-36 months before many people take notice.

US troops to stay in Afghanistan forever

I started writing blogs under Geo politics in South Asia and MENA about five years back. The objective was to share my views with global readers, particularly the Think Tanks operating in the US. Most of the topics I picked up over the years were: 1) proxy wars in Afghanistan, Iraq and Syria, 2) imposition of economic sanctions on Iran for decades, 3) use of crude oil as weapon, 4) melodramas in the name of change of regime, 5) creations of phantoms like Taliban, Al Qaeda and ISIS and 6) dishonest western media.

The title of one of my second blog written in August 2012 was Will US pull troops out of Afghanistan? Despite having little knowledge about international relations or geopolitics at that time, my conclusion was that the US will never pull its troops out of Afghanistan. My conclusion was based on the fact that presence of the US troops in Afghanistan provides it a safe haven for undertaking cross border actions in Pakistan, Iran, China and some of the energy rich Central Asian countries.

I had deliberately avoided mentioning drug as one of the prime reasons for the US troops for occupying Afghanistan, but one of the readers of my blog was prompt in raising this point. If one thinks with a cool head this may be the key reason because it gives control on drug trade and also the money to be paid to militants for killing the innocents ruthlessly and to keep the world permanently under fear. It may also be said that Afghanistan has become a nursery for growing mercenaries and people from around the world get training in the rugged mountains of Afghanistan. They are also paid from the money earned from cultivation of poppy.

Having born and grown in war-ridden Afghanistan, the locals have become ‘blood thirsty’ and suffer from restlessness unless they kill a few people every day. Ironically they not only kill their own countrymen but also go to places where conflicts have been created by the super powers to satisfy their lust.

The conclusion of my today’s blog is that after fighting two world wars, super power have decided to fight proxy wars, sell arms to the governments where rebel groups have been created by them, use income from drugs and oil for buying arms. The job becomes easier through propagation of regime change mantra.

These super powers are among the sponsors of the UN, created for restoring peace in the world. However, now the only role of Security Council is to grant permission for attacking a country chosen for the proxy war. Two of the worst examples are Afghanistan and Iraq and many other countries are also the victim of super powers. Usually the military dictators are made head of state and often the drama of sham democracy is also staged.

Pakistan stock market witnesses decline in volume traded

In a long due correction, Pakistan Stock Exchange (PSX) took a breather during the week ended 23^rd December 2016. The benchmark index closed flat at 46,634 levels. Key event for the week was completion of bidding process for the sale of 40% shares of PSX, where Chinese‐led consortium emerged as the highest bidder with Rs28/share. Volumes dipped during the week with average daily turnover at 336.6 million shares, down by 5.8%WoW.

Major news flows during the week were: 1) Prime Minister Nawaz Sharif brought five key regulatory bodies including OGRA and NEPRA under the administrative control of relevant divisions/ministries, 2) Current Account Deficit for November’16 rising to a hefty US$839 million as compared to US$381 million in October’16, taking 5MFY17 deficit to US$2.6 billion, up 91%YoY, 3) GoP raised Rs149.9 billion in MTB auction where cut off yields for 3 and 6 month moved up, 4) PSMC confirmed plans to launch the standard model of Suzuki Celerio in March’17 that will replace it Cultus model, 5) Competition Appellate Tribunal has dismissed an appeal filed by HASCOL to prevent PSO from acquiring SHEL’s shares in Pakistan Refinery and 6) NEPRA granted power generation license to Maple Leaf Power Limited, clearing the way for setting up an imported coal‐fired plant of 40MW at an estimated cost of Rs5.5 billion. Market leaders for the week were: HMB, EPCL, AICL, PSMC and ABL. Laggards during the week were: MEBL, LOTCHEM, SSGC, HASCOL and ASTL. Foreign participation continued its negative trend with US$45.5 million outflows compared to US$46.7 million in the last week.

The market is likely to largely continue its positive trend over the near term, however room for volatility in the next week remains where risks could emerge in the form of: 1) any swing international oil price on potential concerns on rising US inventories and 2) and political developments gaining prominence. Possible announcement of anticipated exports incentive policy in the near term remains a key trigger for price performance in the textile sector.

Shifting of policy stances (gas price curtailment, privatizations), incidence of higher taxation (super tax continuation, real‐estate) and sector specific packages (auto policy, incentives for textile exports) add up to a 'hit‐or‐miss' policy environment for domestic industry. Sectors bearing the brunt of policy actions include: 1) Textiles through zero‐status scheme granted to all export‐oriented sectors and accompanying DLTL and ERF incentives, 2) Autos from the introduction of AIDP‐II and accompanying incentives shifting long term competitive dynamics in the sector, 3) Fertilizer on support from GST reduction, cash subsidies and reduced feedstock prices in April’16, and 4) Cements, as they faced higher FED, difficulty in approval for coal expansions and blowback from real estate taxes. For CY17, analysts expect regulation pertaining to export competitiveness to continue, while expansion projects with FDI elements (foreign ownership) to continue remaining in favor. Moreover, as election year approaches, targeted subsidies for agri‐linked sectors, consumer cyclical (Autos, Consumer Goods) from widely accepted populist policies, are expected to gain steam.

Balance of payment metrics in November'16 has remained unimpressive. While exports for the month marked slight recovery with 6.2% sequential rise, they remain flat on YoY basis which coupled with 6.0%MoM/10.8%YoY rise in imports has pushed the trade deficit 10.5% MoM/14.3%YoY higher. While remittances improved 3.3%YoY for the month to US$1.61 billion, dip in flows from GCC region at 0.8%YoY still remains a concern. Foreign investment inflows netted at US$87.2 million in November'16, down 41%YoY, where FDI stood at US$143.7 million (down 37% YoY) as inflows from China have been slow this fiscal year (China's share in 5MFY17 down to 34% from 45% as compared during the same period last year). Going forward, Balance of Payment trends are expected to worsen; with little room for fast paced recovery in exports. Analysts see FY17 trade deficit expanding by 14%YoY which coupled with flattish remittance flows should keep the deficit high.

Chinese consortium submits highest bid to acquire 40 percent shares of Pakistan Stock Exchange

The consortium consisting of China Futures Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange, Pak-China Investment Company (PCIC) and Habib Bank (HBL) have reportedly submitted the highest bid of PkR28/share for the 40% strategic stake (321 million shares) of the Pakistan Stock Exchange (PSX). In the consortium, China Futures Exchange, Shanghai Stock Exchange and Shenzhen Stock Exchange would be allotted an aggregate stake of 30% while PCIC and HBL would each be allotted 5% of the strategic stake post regulatory approvals.

At the onset, this should be positive for the Pakistan market as it should enhance the brokers’ capacity to trade (opportunity to enhance net capital balance). In this regard, the transaction should result in an inflow of PkR 8.9 billion  (US$86 million) for around 200 owners of the PSX. Leading Brokerage house, AKD Securities believes that cash proceeds from this transaction can take up to two months to move out of the escrow account.

Other benefits to accrue in the medium to long term include: 1) increase in investor base, 2) up-gradation of technological infrastructure / technology transfer, 3) liquidity inflow from the launch of new products and 4) cross listings and market access for Pakistani companies.

Analysts remain positive on the Pakistan market as the current 21% valuation discount to MSCI Asia Pacific ex-Japan Index is expected to narrow on the back of enhanced liquidity present in the market coupled with formal inclusion in the EM space in 2017 and improving growth rates.

Pakistan textile sector performance far from satisfactory

In continuation of the previous month's positive performance, external trade shows improvement in November 2016 exports amounting to US$1.76 billion, exhibiting reversal from the consistent monthly downward trend seen this year. Textiles and clothing sector, which constitutes more than 60% of country's exports also picked pace, rising 9.7%YoY to US$1.05 billion during the month under review. This growth was broad-based recovery in both low value (+15.6%YoY) and value-added segments (+7.6%YoY). However, on a cumulative basis, 5MFY17 textile exports were still lower at US$5.13 billion.

Going forward, analysts expect textile exports to largely remain under pressure due to: 1) demand side bottlenecks with weak Chinese demand outlook and economic slowdown in the EU following Brexit, 2) lower currency competitiveness amid sharp depreciation in regional currencies and 3) low commodity prices. That said, sector anxiously await yet to be announced incentive package estimated around Rs75 billion by the Government of Pakistan (GoP). This aimed at enhancing export competitiveness over regional countries and providing relief to the textile sector. Moreover, encouraging cotton arrivals to date for MY17 (up 12.33%YoY to 10.14 million bales) is expected to reduce cotton shortfall next year.

Performance of the value added sector posted growth with Knitwear, Readymade garments and Bedwear registering double digit growth. Moreover, the low valued added segment depicted commendable recovery after a consistent decline this year, where exports of cotton yarn increased by 42.1%YoY/10.3%MoM. However, on a cumulative basis, textile exports after recovery still remain unimpressive with 5MFY17 exports recording a decline of 2.0%YoY.

According to the fortnightly cotton arrivals report of PCGA, a total of 10.14 million bales arrived in the country by Mid December this year as against 9.03 million bales last year, up 12.33%YoY. Arrivals from Punjab increased by 19.38%YoY to 6.44 million bales, while flows from Sindh increased marginally by 1.86%YoY to 3.70 million. Initially the GoP had fixed the target of cotton for MY17 around 14 million bales, which was later slashed to less than 11 million bales. In an attempt to ensure ample availability of cotton in the country, the GoP has also lifted ban on cotton from India.

Going forward, any substantial increase in the export of textiles and clothing seems unlikely amid emerging: 1) concerns on low currency competitiveness following sharp decline in regional currencies, 2) risk of potential decline in exports to European Union post Brexist and 3) sluggish Chinese demand. The added irritants are disruption in supply of electricity and gas despite high tariffs. Ministry of Textiles, Ministry of Commerce and Trade Development Authority of Pakistan (TDAP) seems to have gone into complete hibernation.