Cement prices in flux

Cement prices have now been raised on average by Rs60 per a 50-kg bag, nearly half of that gain coming about in just the start of this month. The price hike is almost entirely brought forth by players in the north, now standing neck and neck with the prices set by the south. On average, prices in Islamabad went up by Rs92, Lahore by Rs80 and Peshawar by Rs102.

The price hike comes in an aftermath of the rupee’s depreciation against the dollar (down by nearly 15% this past year and termed the worst performer in Asia by Bloomberg), coal prices hikes globally and the increased FED (Rs75 per bag, against Rs62.5 per bag last year). The manufacturers are passing on these unfavourable fundamentals onto consumers. In the past though, when the industry saw a slump in global market for commodities, manufacturers were able to shore up margins by not passing on the benefits to consumers.

According to the SBP’s State of the Economy’s report, profit margins averaged 33 percent the last five year, more than double the manufacturing sector’s overall average. That allowed manufacturers to undergo expansions of over 30 million tons.

The sector wrapped up FY18 on a phenomenal note—capacity utilization reached his highest in two decades. The industry grew by 14 percent in FY18 year on year (FY17: 4%; FY16: 10%, FY15: 3%) despite exports slow down, largely driven by the development work happening across the country, not only infrastructure related but also related to commercial and domestic real estate growth.

The question is whether this demand will be sustained, enough to absorb the capacity expansions. And ultimately, that will be a determining factor for cement prices going forward—which have remained comparatively higher than domestic players in regional economies. The development expenditure marked for infrastructure development may see some shifts with whoever forms the new government. However, among major contenders, substantially raising housing supply is one of the promises made during campaign. Moreover, the SBP just came out with a housing policy to encourage mortgage financing for low-income households.

If these policies do materialize, cement demand is expected to continue its current growth trajectory over the next few years, even if exports see no growth at all. Strong utilization means cement manufacturers can increase prices in tandem with their rising costs of production should coal prices continue to go up and/or devaluation lingers. All bets are off though if demand does not meet expectations.

Coal futures see prices go down. However, some analysts believe prices will go up further (from Citibank, IMF etc.). China is restricting production due to environmental and safety concerns of its own, and will be relying on imported coal from other locations. This would raise prices if overall demand persists. In Pakistan, construction for consumers inevitably will become more expensive, hitting mid-to-low income buyers more than any other.