One could cite a wide range of reasons for cement offtake plunging 22 percent in the Jul-Nov period (year on year)—from construction demand being affected due to floods to reduced government spending as the administration tries to slow down the economy—the mounting cost of construction is certainly a prominent one, especially for the demand coming from the private sector. The weekly average price for cement during the period Jul-Nov has risen 50 percent—or up 1.5 times--compared to the average price during the same period last year. Last year, the average price of cement was Rs694 per bag versus this year’s Rs1039. In some markets, like Lahore, the price hike has been even larger than that.

Prices in the north and south markets have also converged—closing the gap between the two zones—a gap that was very visible in 2019 when there was greater price competition in the northern markets. At this point though, since cement companies have already anticipated the reduction in demand—estimating a drop of 10-15 percent—they have shown less willingness to bring down prices. Sustaining prices at their existing levels is what enabled the industry in the first quarter to deliver a stellar performance. Dispatches dropped 25 percent but higher prices ensured a revenue growth of 23 percent that resulted in pre-tax earnings growth of 11 percent and margins remaining constant at 25 percent (calculations are based on company accounts of 16 companies listed on the PSX—read: “Cement: Winning a losing game”, Dec 2, 2022).

Though demand pressures are mounting, cement is certainly not the only industry within the construction sector to raise prices—everything from steel to marble and tiles to fittings is expensive—which is contributing to the weak appetite in the market for new constructions. According to the Pakistan Bureau of Statistics’ monthly price index, in Nov-22, the index for construction input items rose 30 percent compared to Nov-21, construction wages rose 13 percent against the index increase of 21.56 percent. Existing projects are facing cost overruns and new projects are being delayed. The promise of affordable housing remains unfulfilled and abandoned.

The industry is stuck between a rock and a hard place. Costs for them are rising too—costs per ton sold for the industry during 1QFY23 rose 63 percent versus a revenue per ton growth of 64 percent. Though coal prices in the global markets are dropping now, other cost factors will continue to affect margins lest prices are raised in tandem. However, if the costs of construction become too prohibitive, demand may decline faster. Currently, the capacity utilization is substantially less at 67 percent compared to last year’s 89 percent. Right now, the industry is profitable, but with export markets continuing to dry up, and domestic demand falling even further, FY23 may become too tough a pill to swallow.