Cement: Trade-offs

Based on current cumulative numbers for cement dispatches in 11M, cement industry will contract by 10 percent this year compared to FY21. This lays in sharp contrast with industry expansion targets where expectations for the industry to deliver a 10-15 percent annual growth was considered pretty reasonable given massive infrastructure and power projects in plans and the then PM’s Naya Pakistan Housing Plan. But with domestic demand not matching expectations, considerably slowing down amid construction costs shooting up dramatically and the housing project remaining largely stalled, the industry will have to wade off this storm for a little while longer.

At such a time, DG Khan Cement’s announcement that it secured an export order in the US for its cement is certainly a welcome one. The company set up a plant in the south primarily to reach markets overseas that are not accessible to many cement plants located in the north. Transport is a dominant cost component for cement makers and proximity to the ports makes a huge difference. Currently, Pakistan’s overseas and cross-border exports stand at 11 percent of all sales—which was 17 percent last year. On a month-on-month basis, exports share dropped to 5 percent of all dispatches with demand for Pakistani cement out of the country remaining sombre. Most cross-border exports were affected because neighbouring countries are experiencing massive political and economic upheavals. Sri Lanka defaulted on its external loans and will probably take a few years to get back on its feet and have its spending on infrastructure revived. Afghanistan meanwhile is undergoing its own political and economic turmoil after US exit from the country. Overseas exports by cement mills in the south at the same time have lagged considerably behind target because of the volatile supply chain situation in the aftermath of covid. Freight rates have risen over 200 percent in this time making exports seriously unviable.

At a time when exports have become difficult and domestic market has hit pause, landing a dollar-based sales contract bodes well for mills like DGKC. If more such orders are won by cement mills here—mainly plants in the south—it can also work as a hedge against the monumentally expensive coal that cement mills have to procure from abroad. Whereas northern-based mills have been able to buy the more affordable Afghan coal, mills in the south have had to incur a higher cost of coal as their access to Afghan coal remains limited.

The domestic market is becoming that much tougher. Cement makers have to make important trade-offs. They have to buy costly coal to make cement, for which they have had to keep raising prices. Between May-20 to May-22, cement price index expanded by 51 percent according to the Pakistan Bureau of Statistics (PBS). This—together with steel prices—has made construction very costly for builders and home buyers and impacted demand. Meanwhile, with the PTI ouster, the PM housing project will essentially be pushed into the backburner. The government has also had to make cuts in PSDP. All that will reduce demand that was expected to materialize. If construction costs go up further, demand will suppress even more. At some point, cement makers will have to decide whether it is worth raising prices. That said, construction costs depend more heavily on steel prices and how the steel industry moves in terms of pricing will undoubtedly impact cement mills too.