Construction: Adieu!

Despite a substantial, near dramatic rise in steel prices, steel production in the July to May period (11M) according to the Pakistan Bureau of Statistics (PBS) rose 33 percent against last year. This includes steel billets and ingots used primarily in the construction industry. Domestic dispatches for cement however, dropped by 2 percent during this period. The latter industry got a tough beating in the export market too where overseas and cross-border exports fell 42 percent. Curiously, steel production has grown much more than cements dispatches.

One of the dominant reasons cited for a drop in cement dispatches this year is substantially higher pricing. Cement prices between May-21 to May-22 for instance, according to PBS’s recorded data have increased 36 percent. Steel bars and sheets index rose higher—at 42 percent. Bricks cost 9 percent more. The wholesale price index during this period rose 30 percent. Evidently, most building material costs surged, higher than inflation in general. In the past two years, cement and steel became 51 and 58 percent more expensive. This resulted in a delayed drop in demand, but certainly one that eventually materialized. But it would seem that the primary driver for growth thus far has been public infrastructure and development projects—mainly hydro power projects—as opposed to housing, commercial and other non-infrastructure related construction.

This is where more steel is used compared to building construction where the ratio of cement to steel is lower. Infrastructure projects, especially hydro power projects require more steel reinforcement. The cement to steel billet ratio over the past two years has dropped from 13 tons of cement for 1 ton of steel to 9 tons of cement used for 1 ton of steel. This implies that less cement is being used for every ton of steel.

Meanwhile, with PTI leaving the building, the hopes and dreams of mobilizing and growing supply of 5 million housing in the country have also more or less left the premises. There is uncertainty about the mark-up subsidy that was earlier introduced by the SBP that facilitated home loans at subsidized rates to the public at large. Perhaps, the mechanism has to be revised given funding constraints and the new government coming in. The last time SBP updated the MPMG data was in Feb-22! The scheme has clearly hit pause after approving (not disbursing) anywhere between 10,000 to 50,000 new home loans. The SBP was careful not to disclose too much data for a detailed look at how exactly the scheme performed. BR Research estimates suggest the scheme started off well perhaps, but had no way to ensuring consistency and sustainability. For instance, nobody planned what would happen after PTI leaves! Furthermore, whether the scheme really led to additionality and contributed to new housing supply in the first place also remains a question mark (read detailed analysis: “Housing Finance: Growth, but!”, Jan 12, 2022).

Amid economic firefighting, prohibitive price inflation and high interest rates, housing and construction demand, specifically, the Imran-Khan-dream of building massive housing, can be pushed into the backburner. Current and expected demand both indicate how the policy failed to launch (more on that later).