Here’s the thing: despite yawningly weak demand that is only becoming weaker every month, the financial success of most cement companies almost entirely hinges on their strong pricing power, and ability to sell just enough cement at desirable prices. This is why in 1HFY24, with dispatches up 10 percent, revenues for 15 listed cement companies combined were up 20 percent. Let’s not forget, that the major thrust in demand during the period came from exports that more than doubled compared to 1HFY23; domestic sales grew only 1 percent. But the resulting revenue and earnings growth was enabled by prices—on average—surging at a much higher pace than costs did.

After years of cement prices trailing between Rs500 and Rs600 (see graph)—what would now appear to be very small weekly movements—since FY21, the price trajectory in the domestic markets has been more pronounced and steadfast; relentlessly moving in one direction—upwards. In Dec-23, the average price of cement sold in various markets reached its peak which crossed Rs1200. In the most recent recorded week, the average cement bag costs Rs1221, lower than the peak of Rs1244 (note: this is an average price for Pakistan; different cities/markets have different rates). Prices have come down over the past four consecutive weeks without fail. The decline itself is not as significant, but the question it raises is. Does this represent the end of the unwavering price ascent?

It could. Demand slowdown certainly seems to indicate it. Take the latest numbers for instance. In 8MFY24, domestic offtake has “visibly stagnated” (read: “Cement: Out of proportion”, March 18, 2024). Total offtake grew 3 percent, where exports were up 73 percent—now pitching in 15 percent to the sales mix—while domestic offtake dropped 4 percent. And FY23 was not a great year either in terms of offtake. In fact, mapping out the average monthly offtake between FY17 and FY24 (for the period 8M), cement offtake in domestic markets in the current year is lower than five out of the seven years under observation. Let’s restate this. In 8MFY24, the average monthly local offtake stands at roughly 3.26 million tons, lower than last year’s 3.4 million tons and only higher than FY17 and FY19 whose averages stood at 2.85 million tons and 3.16 million tons respectively. But wait. What about capacities?

Between FY17 and FY24, the industry capacity to manufacture cement has increased by 72 percent. Despite an impressive export performance, current capacity utilization is around 55 percent, leaving a major portion of installed capacity lying idle. Demand is simply not there and a host of reasons including persistently high interest rates, still uncontrollable inflation, rising taxes, and ballooning expenses leading to reduced spending power are all depressing demand. New government spending on infrastructure and development projects underway may spur demand once again, but until that happens, there aren’t many new avenues of demand opening up.

Over the past year though, there have been many instances where price wars could have occurred due to sliding capacity utilization and weak demand, but it looked like there wasn’t enough incentive for that to happen substantially. Or perhaps, a stronger alliance was forged between companies than ever before. One could only say that definitively after reviewing company-level data. More on that later.