Cement: Slowember season

November has rolled in with few celebrations on the demand front for cement manufacturers. But nothing out of expectation either. Cumulative offtake in the 4M period for the fiscal year so far has dropped 22 percent to 17.8 million tons; of which 16.3 million tons were local dispatches. Exports have dropped substantially—down 47 percent—to stand at 9 percent of dispatches.

Certainly demand is coming down. Gauging from the five-month average dispatches, the monthly average is the lowest since FY17 when average (5-month in this case from Jul through Nov) was 3.3 million tons as opposed to today’s average of 3.57 million tons. However, the past three months—Sep to Nov—dispatches in the domestic markets have remained more or less steady, the real turbulence coming due to a drop in exports. In Nov-22, export share dropped to 4 percent of total dispatches which is very low considering historic records.

Despite the drop in offtake though, the industry’s before-tax earnings grew 11 percent during the first quarter. Strong pricing has enabled cement manufacturers to keep delivering profits despite a shrinking market. New projects and new constructions are not coming into play and most demand is supporting existing projects—commercial, private and public—already underway. Many construction projects are facing cost overruns due to the ballooning cost of construction materials, of which cement is primary. In 1QFY23, revenue per ton sold for the industry rose 64 percent (as estimated by BR Research using financial data of 16 cement companies listed on the PSX), which should indicate the direction and impact of prices in the revenue growth (up 23%).

The industry has been using less expensive coal from Afghanistan or Thar to compensate for the price hikes in the international coal markets. Now with coal prices dropping globally, cement manufacturers can import from abroad as well. However, the economy’s precarious balance of payment crisis, depleting foreign exchange reserves and depreciating rupee all point toward the need to reduce imports. The government would want to curtail further imports and may adopt restrictive measures to do so. This would have made it hard for cement manufacturers but since they have a few months inventories, demand is sluggish and declining, and domestic coal is still available, they should be good on the input side and may not face supply-chain challenges other industries are facing. The industry would also likely keep prices at the same level as they contend with significant increase in their overall cost of inputs. Finance costs are rising too. With demand recovery not on the horizon amid rising costs and expenses, the challenges for the industry to keep turning a profit are only mounting.