Being Lucky

Amid plunging volumes, cement manufacturers have continued their plans to bring new capacities online to meet the great demand that was expected to be flourishing by this time; growing on the back of PM Imran Khan’s construction package, 5 million houses being rapidly built, and new infrastructure spending. That dream is over before it could start, but new cement capacities are on track, the latest of which is Lucky Cement’s 3.15 million tons of capacity in KP.

The company (PSX: LUCK) was never too far away from the top, trotting about with its massive capacity spread between both the northern and the southern cement operating regions, and trying to capture a piece of the pie in both the domestic markets, as well as abroad by exporting overseas. Its new expansion allows it to stay in the running for the top spot, next to Bestway Cement only operates in the north.

In November, the cumulative (Jul-Nov period) demand fell 22 percent year on year across the industry. Exports share has dropped to 9 percent in total sales as compared to 12 percent last year, and the share keeps on sliding month after month. Lucky’s offtake dropped 30 percent—slightly higher than the 1QFY23 industry offtake decline of 25 percent. But at such a steep drop in volumes, the company managed to hold enough pricing power in both markets to deliver a stellar performance for investors.

Most cement companies shifted to Afghan or thar coal to cushion the blow to margins from imported coal. Lucky has been using a mix of Afghan and local coal at its northern plants together with South African and Indonesian coal at the southern plant which helped margins to improve to 31 percent, which no small feat. Meanwhile, without any substantial debt exposure—hence minimal finance costs—and really robust “other income” that buttressed the bottom line by 37 percent (i.e., other income was 37% of before-tax earnings), Lucky had an earnings growth of 17 percent. Lucky Cement is right where it needs to be. For now.

That demand has been falling should weigh heavy on the head that wears the crown as dampening offtake may take away the pricing power the industry is enjoying right now. This will become even more real once new capacities come online and shake up a little bit of price competition, which has always been the case when the expansion cycle begins.

On the upside, coal prices are falling in the global markets, expansions are well-spread out diminishing the risk of price competition, and most expansions are covered under SBPs concessionary financing scheme for long-term capital projects which will reduce the impact of rising interest rates. While this may cover the cost side, sliding demand may make it even more difficult for cement manufacturers to sell at current prices. Construction costs are proving to be prohibitively high. Some cement manufacturers are optimistic that flood-related rehabilitation will boost demand—but the truth is, this demand may come later rather than sooner. And the wait may be prolonged, and rather painful to the industry bottom lines, even Lucky.