What should the outlook of an industry whose demand has plunged 16 percent over the year—capacity utilization of which has fallen to a historic floor of 57 percent—be? Surely not positive. Except, analysts looking at the cement industry imagine just that, despite predicting a continued slowdown in demand. Soaring cement prices have completely changed the game, which judging by the wholesale price index for Jun-23 is showing no significant signs of weakening.
Import restrictions are now relaxing, and international coal is no longer as costly as it was only a year ago—down 66 percent between June of this year and last. The commodity certainly had its moment shining hot in the sun for a while there but has retracted its step trailing a reasonably optimistic price for buyers now. Cheaper coal should mean cheaper cement in the domestic market, right? Not today. Domestic cement prices here at home have continued to surge beyond expectations of demand and supply. Is this what greedflation looks like?
The industry was fortunate to not face shortages of supplies such as coal amid the country’s import restriction as manufacturers were able to quickly recalibrate their coal mix to locally procured coal and coal brought from Afghanistan long before the LC restrictions were introduced. This was at a time when coal prices in the global market were at their peak and cement manufacturers were at a danger of watching their margins slide. Alternative sources came to the rescue quickly.In 9MFY23, margins for the industry (16 listed companies) were at 26 percent strong compared to 25 percent same period last year. Pricing power in the domestic market, slowly but surely going up, allowed the companies to secure their margins when demand was down 18 percent during that period. Revenue per ton sold for the industry was up 53 percent demonstrating the impact of prices despite the lower offtake, while costs per ton sold rose lower—at 51 percent (this is for the combined 16 listed companies on the PSX). Companies have continued to pass on the costs to the consumers and then some to keep their margins intact. Combined before tax earnings grew 17 percent in 9M which is deeply impressive.
Inflation in Pakistan is worrying but Pakistan is not quite as alone as it seems. Inflation world-over is at its multi-decade high as the global economy slipped into multiple all-encompassing predicamentshitting one after another over the past two years; first with covid which caused the supply chain obstacles that followed it and then the biggest hit coming when the Russia-Ukraine war began. Even as prices are now easing, indignant chants from economists and concerned central banks of major economies are pointing at corporate greed as the primary driver of inflation. That large corporations have been raising prices ceaselessly under the guise of cost and supply disruptions, leaving unsuspecting consumers facing inflation from all sides none-the-wiser. The Economistmeanwhile, rubishes the idea that present inflation was led by “greed” and argued it was excess stimulus that led to a spending spree by consumers that then led to inflation, blaming policymakers for not tightening fiscal policy in time.
Here in Pakistan, the narrative is weaker currency, higher commodity prices, rising energy costs that have led to runaway inflation. That much is undeniable, but it does not mean some corporations are not raising prices just because they can. There is certainly a smidgen of that, quitely seeping in, as the chaos unfolds. The cement industry has been operating significantly under-capacity unable to sell enough in both exporting and domestic markets. Usually, when this happens, companies compete on prices to offload as much cement (or clinker) that they can which brings prices down. At this time, they have no incentive to. Other construction materials (look at steel rebars) are also selling at premium—why make cement cheaper when everything else is not? As such, a decline in price won’t necessarily raise demand, prolonging the time until cement prices start to recede for consumers.
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