According to budget 18-19 documents, the government intends to get the highest Federal Excise Duty (FED) from cement to the tune of Rs71 billion (up 18%); second to tobacco. Meanwhile, custom duties on iron and steel items will cross Rs52 billion (up 22%); second only to vehicles imports. Demands for both are massive and it makes sense the sectors will be solid revenue makers. But construction costs may escalate for consumers as well. In the budget, FED on cement has been raised to Rs1.5/kg from Rs1.25/kg while sales tax on steel has been raised to Rs13/unit of electricity consumed from Rs10.5/unit.
Earlier in the month, news was adrift that the regulatory duty (RD) imposed on the import of steel items (5-30%) will be reduced or removed, but no announcement to the effect has been made yet. This means steel imports will remain expensive and local manufacturers may raise prices as a consequence of higher cost of production. Steel makers have raised prices after RDs were first imposed on imports.
Meanwhile, last budget when cement FED was raised, cement manufacturers subsequently raised prices. Average price increase between 18 May 2017 and 22 June 2017 was Rs17 when the budget was announced on 26 May 2017. FED used to be Rs50 per a 50-kg bag during FY16, raised to Rs62.5 bag during FY17; but the price hike was higher than the FED. Prices slowly declined in the latter part of 2017 as exports fell, and new plant expansions came through.
However, that was a short lived period. Rupee depreciated against dollar around 9 percent which made imports more expensive. Meanwhile, many of the expansions in the North region were halted by order of the apex court due to environmental and regulatory issues. The sector is currently also operating at maximum capacity utilization. Together these factors allowed cement manufacturers to raise cement prices between Rs30 and Rs60 per bag (Multan: Rs55; Peshawar: Rs57; Lahore: Rs60) in the Feb-April period. On average, prices went up between Rs521 to Rs553.
Now with the new FED at Rs75 per bag, it is likely cement price may increase further by Rs12.5 per bag falling in the range of Rs570-590 across different cities. The budget also announced the import tax on coal to be reduced to 4 percent from 6 percent but this is unlikely to offset the rupee devaluation. Coal prices globally have also been uncertain. China has begun to restrict supply of coal which will result in higher coal prices if global demand also moves upward. This would aggravate import costs for cement makers.
The industry had been seeking zero FED and import duty on coal to bring down costs of production. Margins for the sector have no doubt fallen. Prominent players like Bestway saw margins drop from 44 percent to 36 percent, DG khan cement from 37 percent to 25 percent, Kohat from 45 percent to 34 percent and Lucky from 48 percent to 36 percent in 9MFY18 year on year. Price hikes at this point are inevitable to secure margins and they are also possible since demand is robust, capacity utilization is at its peak and many expansions are delayed.
Comments
Comments are closed.