Cement: Price promises!

Cement players had indicated that cement prices would be increased in accordance with coal price increase globally. Coal prices had been falling for a number of years but recently rebounded, starting to move upward, shooting by nearly 58 percent in the past six months.

Now different sources suggest local cement prices have been bumped up by Rs12-20 per 50-kg cement bag from the current price range of Rs485 to Rs540. The price increase is said to be in the North region, and not in the South since the latter already charges Rs20-30 more compared to cement companies in the North.

This price increase would allow cement players to maintain their margins that are currently averaging at 36 percent with highly efficient players like Lucky boasting gross margins of 51 percent in Q1FY17.

Compared to other regional countries, Pakistani cement locally has always been more expensive; charging almost double the price in neighbors such as China, India and Iran. As this column has previously mentioned, EBITDA per ton for Pakistani cement stood at $28 during FY16 while it was $11.2 for Indian cement manufacturers. The differences are stark. Pakistani margins are 2.5 times those of its Indian counterparts.

Meanwhile, when exporting, Pakistani cement is much cheaper because they have to compete with other cement suppliers. The differential in price between Pakistani cement sold locally and exported is as high as Rs200 per bag. In fact, Pakistani cement currently has a hefty anti-dumping duty imposed by South Africa because it is so cheap.

In a free market economy, the functional dynamics of demand and supply determine the price and cement players are not in the wrong to exercise the right to increase their prices. The world of Pakistani cement works very much like a cartel and a free market, so to speak, does not truly exist. Entry barriers and regulatory issues such as difficulties in attaining license make for less chance of more players entering this high-demand sector. This lack of true competition is also exacerbated by a 20 percent import duty on cement.

Prices are increased in tandem with raw material prices or energy costs in order to safeguard the high margins, but such should only happen when the economy is truly a free market. With restrictions on imports and new entrants, prices can be fixed and bumped up unabated while the consumer of such products will always be worst off because he would have little choice. How fair is that?