Despite facing a precarious cost situation owing to erratic coal prices in global markets, plummeting exports and weak domestic demand, Kohat Cement’s (PSX: KOHC) income statements look pretty good.

Estimated dispatches dropped three percent in 1HFY22 year on year for Kohat, with exports nearly vanishing and demand in the domestic market growing only marginally. The resultant revenue growth of 35 percent is almost entirely driven by improved domestic retention. Based on the estimated dispatch number, Kohat’s revenue per ton sold grew 39 percent. Costs, on the other hand, were another story.

Coal prices globally have witnessed quite the rally for the past year or so. After demand pressures from China eased as coal stocks were replenished, prices were normalizing but other disruptions –such as Indonesia blocking coal exports to first ensure domestic market is served—have sent them hurtling forward again (read: “Coal calling”, Jan 20, 2022). In addition, rupee depreciation has further worsened costs. Cement manufacturers have thus been importing from Afghanistan using a shared mix of Afghan and South African coal. But Afghan coal is also becoming pricier. Supply of Afghan coal is also curbed by political tensions and skirmishes.

Kohat’s estimated cost per ton sold in 1HFY22 grew 24 percent—lower than revenue per ton sold—but adequately reflecting the cost volatility. Margins still grew to 32 percent compared to 23 percent in 1HFY21. The company kept a tight leash on overheads—stable at three percent of revenue. Finance costs also dropped from 2.5 percent of revenue to 1.6 percent of revenue-almost negligible due to reduced debt. About five percent of the profits are bolstered by other income.

Overall, Kohat stands solid with earnings doubling in 1HFY22 compared to the period last year. Continued prudency in coal inventory management by keep watch of market trends and timely procurement as well as diversifying fuel mix would likely keep Kohat firmly planted on the ground. The company’s new expansion is set to be finalized and machinery contracts soon to come in place.

In coming quarters, domestic demand would dictate where the dust settles. Building material cost price hikes in the past year caused quite an interruption in construction demand. If cement makers keep raising prices in the north citing higher costs, construction demand—which has been slow in its growth trajectory—may not grow with expected enthusiasm.