The future of cement industry—for the most part—hinges on whether domestic demand will materialize. Last year, the industry turned once again to profits cumulatively earning Rs40 billion during FY21 against a loss in the previous year. This was made possible through robust demand in local markets, pricing power back in the hands of cement manufacturers, ensuing price increases and currency appreciation that shielded the industry from the dramatic rise in coal costs.
Coal prices are still rising (“Coal dunnit”, Aug 6, 2021), when they were expected to start simmering down in the first quarter of FY22. This will continue to put pressure on cement manufacturers to raise prices, at a time when the government has indirectly signalled cement makers to curb revising prices upwards. Demand in Aug-21 improved compared to July—which was low due to Monsoon—but cumulatively, overall dispatches are not turning out per expectations. In 2MYF22, total cement sales dropped by a slight 2 percent. But then FY21 was a booming year for the industry where both domestic and exports demand remained strong.
As predicted in this space, exports will take the back seat in the total sales mix, and signs of confidence cracking on exports are already visible. Exports during 2M declined nearly 40 percent from those recorded in the corresponding period last year. From the north, the decline was 17 percent and from the south, exports fell 45 percent. Monthly average share of exports in total dispatches has fallen to 12 percent, from 16 percent.
Recall that the demand in domestic markets was predicted to be unparalleled in the coming years—on the expectation of which the cement industry also churned out feasibilities to invest in plant expansions. With the government providing multi-level incentives to the construction industry, with increased spending on hydro power projects across the country and also the official launch of the Naya Pakistan Housing Program all set to ramp up housing supply, there were several demand drivers working in unity.
But though, a number of housing projects have been launched by provincial housing authorities and other land-owning agencies owned by the governments, private sector is playing hooky where “low-cost housing” is concerned. There aren’t too many housing projects being announced under NPHP from private sector developers who have been crying foul over rising cost of cement and steel. That’s just tough luck (read “Cement prices: Unaffordable Truths”, Aug 26, 2021) but builders will have to bite the bullet on it because there is no rationale behind government stepping in and injecting distortions in the market.
Dam and other infrastructure projects however have already kicked off and public spending on the same will happen which secures demand growth. But if domestic demand begins decelerating, cement players will have to take a price cut and increase exports. North players may not find the market access—given primarily the current political uncertainty wrecking Afghanistan. Meanwhile, south players could start exporting more clinker overseas, but the impact on their margins would not be favourable.
The persistently rising coal prices in the international markets (and other input commodities) together with shipment delays are also looming concerns for the industry as it finishes its first quarter for the fiscal year. 2M is too soon to make a prediction on sector performance but some crucial risks have certainly reared their head.
Comments
Comments are closed.