The fact that construction activity would not be keeping up with the expectations set forth only a couple of months before the new government came into power is really a matter of foresight. Local demand for cement started showing signs of fatigue earlier toward the start of the fiscal year. Steel bar sales also dropped. Nearly half the construction demand comes from mega development projects, while the rest is divided in commercial and housing construction. Multiple factors are hurting demand.
Since Imran took over the reins, the country has been grappling with handling the twin deficits contemplating whether to go for the IMF bailout or not while reaching out to friends for support. While CPEC projects already underway are not being touched, many expected projects were cut from the list of planned expenditure. PSDP funding was slashed down by 450 schemes from the current fiscal year alone (850 in total) worth Rs1.6 trillion. This will be a substantial cut for construction.
Commercial and real estate development on the other hand are also facing the heat of the economic slowdown. Not only is there a reduction in demand from the housing sector, until recently, there was a ban on high-rise construction imposed by the Supreme Court. After lifting that ban, there may be some revival in both cement and steel demand but not as much. The hike in interest rates are making cost of borrowing higher and is not a very enabling environment for investments. Meanwhile, there is a restriction on the purchase of property on non-filers.
Due to depreciation of the rupee against the dollar, and perhaps weak inventory management on the part of manufacturers, given also uncertain demand environment, imported raw material for construction materials like cement and steel has become more expensive. Adding insult to injury, imported coal prices themselves have been moving up. Construction manufacturers can raise prices but at the cost of losing market share.
For steel, industries like engineering and automotive sectors are themselves witnessing a downtrend. Meanwhile, there is a pressure on prices which is why smuggled steel coming from Iran is selling more. Local steel players are now slashing prices down to stay competitive, fighting for the shrinking market space.
On the cement front too, there is an increased pressure on prices particularly in the north with the industry expanding faster than demand is growing. Exports are growing comparatively better but local demand may not keep with the pace of the additional capacity. As predicted earlier, utilization will come down, prices will have to come down too as cement makers will be fighting to retain market share. So far, they have found other exporting markets to send excess cement but they generally get lesser margins on exports which isn’t ideal in a high cost of production environment.
What will be the saving grace? Perhaps the promised 5 million houses under the Naya Pakistan Housing Plan? Liberally speaking, BR Research estimates suggest the plan should lead to an annual 20-22 million tons of additional cement (proxy: each house on average would require 400 bags of cement). Steel demand should increase by 4 million tons (proxy: for every six tons of cement, one ton of steel is used for construction). Will this keep the sector afloat? Maybe one could tell if they knew anything substantial about the plan in the first place but information is sparse. More investigation needed.
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