Though cement dispatches grew by 15 percent in 9MFY18 year on year, financial results of cement companies during the period are presenting quiet the opposing view; but for reasons out of their control. Bestway Cement, Fauji Cement and Kohat Cement announced the nine-month accounts ending March 2018 where top-line growth stood at a paltry 3 percent and 0.3 percent for Bestway and Fauji respectively, with Kohat’s revenues dropping by 3 percent. There are three major dynamics that are coming into play: higher coal prices, fluctuating retention prices in the northern region and rupee to dollar parity.
During the period, international prices for coal which is a major raw material grew by 9 percent. Meanwhile, the devaluation of rupee against dollar in 9MFY18 was 6 percent year on year. As a result, margins for Bestway and Kohat dropped by 19 percent and 25 percent respectively. Fauji shows a recovery in margins from 22 percent in 9MFY17 to 24 percent during the period this year but this isn’t cause of celebration just yet.
In 2016, after an accident at its plant site, Fauji had to shut down one of its production lines. The company was resigned to buying expensive clinker from nearby companies in the north that resulted in a massive plunge in its margins during FY17. The production line came back online in October 2017 which allowed the company to control some of its rising costs. This is probably why the impact of coal prices and devaluation is not visible on the company’s financial accounts.
The third factor that is affecting the profitability of cement companies, especially in the north are the prices of cement bags. Though in March 2018, they started to recover, prices had fallen significantly during the Jul-Mar period. Price competition grew in the north during 2017 as Cherat’s expansion came through and suddenly there was excess cement that had to be cleared. Some companies were even giving discounts to clear volume and consumer prices started to recede. This is why even when Kohat’s dispatches grew by 9 percent in 9MFY18; its revenues dropped.
Now as capacity utilization is nearly 100 percent, prices have started to recover. Between 22 February to 19 April, average prices of cement bags have grown by 6 percent where prices in Islamabad jumped up by 7 percent, Multan by 12 percent, Lahore by 11 percent and Peshawar by 13 percent according to spot prices recorded by Pakistan Bureau of Statistics. This is will certainly help buffer the rising cost of production and cement companies might even see margins recuperate.
In indirect costs, Fauji saw a growth in distribution costs as export sales rose for the company. However, all indirect expenses remained 4 percent of revenues during the period, the same as last year. Though in the nine months, finance costs show a decline, during the third quarter, finance costs grew by four times due to long term borrowing.
This will likely grow going forward as the company has commissioned a Waste Heat Recovery (WHR) for line-1 (in addition to the WHR for line-2 already operational since January 2018) together with a captive power plant. Meanwhile, despite having rough nine-months, Kohat is gearing up for its brownfield expansion at its existing plant which according to the company’s PSX notice is “on schedule”. There isn’t much going on at Bestway cement, despite the company being a market leader in terms of capacity. The company did manage to lower its indirect costs from 10 percent to 9 percent of revenues during 9MFY18, also seeing a drop to its finance costs. However, neither of these could help shore up the bottom-line.
Overall, fortunes may turn around as domestic prices per bag go up further, however coal prices will continue to be the bane. If global demand moves upward and China continues to restrict supply in its new quest toward environmental sustainability, coal prices will not provide any relief.
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