Cement: Turbulence ahead

In September, cement offtake numbers almost look like they are coming back to normal, standing at higher than the 6-year monthly average for sure at about 4.27 million tons. This is only slightly lower than September of last year when offtake stood at 4.59 million tons; of which 12 percent of the dispatches constituted of exports. This September, that is 11 percent. Domestic dispatches have performed reasonably well. However, the cumulative 3MFY23 offtake is considerably down; by 25 percent in total, 24 percent for local dispatches and 34 percent for exports. A recovery in sales may not be on the cards until a few expected, though likely delayed demand spurts occur.

For one, construction activity has been severely affected by floods that devastated the country already on the brink of breakdown. Meanwhile, prohibitive costs of construction were cement and steel prices have increased manifolds are keeping consumers sitting at home with their hands in their pockets waiting for inflation to ease. Throat-cutting inflation especially electricity, fuel, and food prices is already keeping people from making large and expensive spending decisions as the government scrambles to thwart price hikes and fails to do so. Public sector development spending is already down while a lot of the construction work for mega public sector projects was halted due to floods. Once that is revived, demand for cement may begin to rise up again. The signs of that are already visible in September.

But an even bigger recovery could come in the form of flood-related reconstruction projects with the funds that the government is currently collecting. The spending on reconstruction itself and the construction demand from it may not however materialize immediately, thereby keeping the fate of future growth spurts in cement offtake tied to it.

Private sector recovery may not happen at all given the economic turmoil the country is in. With inflation sky-high, interest rates rivaling its peaks, and the rupee depreciating, the environment is too toxic for new construction spending. The previous government’s Mera Pakistan Mera Ghar mark-up subsidy scheme is currently on hold so home loans will keep low; lower than earlier because of the higher interest rates. Though they started to decrease in the past week or so, cement prices may stay hiked up as the cost of production for cement companies keep rising. Certainly, it will be a balancing act for cement firms playing out their price strategies against demand and not increasing prices to the level that buyers would not even touch it.