Much like the zero-rated lobby and the sugar lobby, cement and steel lobbies are not far behind in calling the budget anti-business and seeking a revision. Cement manufacturers want the government to revisit the budget 2020 proposal to raise FED. Recall that, the budget has raised the FED to Rs100 per a 50-kg cement bag which is incrementally Rs15 on each cement bag sold. Steel manufacturers on the other hand have different complaints, depending on whether they are a steel raw material maker (scraps, billets), or a steel raw material user (steel melting).
One thing is for sure, the new budget has raised costs for many of the manufacturers which they will pass onto the end-user buyers. However, uncertain demand might make that harder. Though the All Pakistan Cement Manufacturers Association (APCMA) has stopped updating its website since March (along with the monthly dispatch numbers—which allowed stakeholders in the market to keep abreast of the sector’s performance), the PBS numbers for April show that cement manufacturing has come down by 4 percent in 10MFY19. In 9M, this was 6 percent, so some improvement was seen in April, evidently, though detailed numbers are not available. Meanwhile, production of long steel has come down by a whopping 25 percent during this period.
Much has been written about cement demand (read: “Cement’s price and demand unrest”, May 31, 2019) and the cause of its continuous decline. The same dynamics have come into play for flat steel demand which serves the construction, infrastructure and housing industries. Perhaps the only difference is that cement manufacturers also export cement and clinker abroad, so while they can sell off their clinker to foreign markets at thin margins, steel manufacturers do not have market access overseas. In fact, they are under threat of substantially cheaper and more competitive imports despite tariffs and regulatory duties on them. There is something to be said for the lost cement demand in traditional markets like Afghanistan and India which has disproportionately hurt cement players in the north while the clinker being exported by south zone players is merely to keep running their plants.
Though most recently, retention prices have improved, the dying demand had brought prices dramatically down for cement manufacturers in the north. Several cities saw prices fall by Rs100-135 per bag between April and May. The most recent recovery is between Rs30-80 across cities (using PBS weekly price data). The space to raise prices is there if FED comes into implementation but it will come at a time when consumers are already overburdened by falling disposable incomes and higher cost of living. This will further deplete already existing demand.
As mentioned earlier, rising cost of building materials is not conducive to PM Imran Khan’s own plan to stimulate the construction of 5 million houses (read: “Housing under duress”, June 12, 2019). Given higher interest rates, and costs of construction, how the Naya Pakistan Housing Program (NPHP) would successfully get executed is anyone’s guess. It certainly won’t add to the low-income housing stock as current economic conditions will chip away at the little affordability they could muster before austerity kicked off (or them). On the other hand, the budget proposals seem pretty tight and it does not seem that Finance Advisor Hafeez Shaikh and team would give in to the demand of these business lobbies. They seem to have a plan. On the upside, if these measures can break strong business cartels and penalize rent seekers, something that not many governments in the past have attempted, perhaps the NPHP can wait.
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