The cement sector has been witnessing an incongruous growth trajectory. Local demand has been flourishing but exports have been firmly sliding down. Coal prices have gone up leading to higher costs of production but retentions prices have come down because of new expansions coming online. Resultantly, the sector saw a 9 percent drop in its margins in 1HFY18. Despite that backdrop however, the industry decided last week to bump up prices by Rs10 per bag in the north.

Demand for cement has increased dramatically. A monthly average since July 2017 shows a 22 percent growth in dispatches locally with north snagging a growth of 24 percent year-on-year. Because of the decline in exports, total monthly average growth in dispatches stands at 16 percent- so far.

Now, retention prices had fallen—according to some cement companies—due to the increase in Federal Excise Duty (FED) on local cement by 25 percent. However, it seems more likely that the increase in capacity in the north had led to underutilization; which in turn led to companies chasing to reduce prices. Since Cherat’s 1.3 million ton expansion came through, companies located in the region slashed prices over the months by an average of Rs25 per 50kg bag. Some companies were also offering price discounts (up to Rs20-30 per bag) to clear excess volume.

These dynamics are specific for northern players as southern players have lesser demand and already sell at 15 percent higher than their counterparts in the north. In fact, in the north, it was expected that retention prices may drop further as more expansions came through and underutilization further surged. However, in a surprisingly turn of event, a new issue materialized—this time on environment.

A suo moto case was filed with the Supreme Court (SC) that pointed out that because of the over consumption of ground water in the region by cement companies, the Katas Raj Temple located in the salt range of Kallar Kahar had dried up. This led to depletion in the water table. The apex court ordered Bestway cement to fill up the pond, but the matter was far from over. By that time, the Punjab government had also taken note of the negative environmental impact of industries located in the region. (For details, “Cement in chains” published on Jan 23, 2018).

Consequently, the Pakistan Environment Protection Act was amended. It now requires cement companies to seek mandatory review and approval by Environmental Protection Agency (EPA) before construction. This resultantly brought Pioneer and Gharibwal’s expansion plans to a halt. Maple Leaf’s plans of 2.2 million tons expansion were approved by the Lahore High Court. However, the company must now wait for a review of the zonal adjustment survey report by Mines & Minerals Department,

Punjab (MMDP) before starting construction. The Supreme Court’s latest ruling in January has restricted cement companies from undergoing any expansion without the approval of the court. While Maple Leaf’s plans falls in the green zone of the MMDP survey, Pioneer and Gharibwal may have to go for alternative locations and/or fulfill the environmental assessment requirements.

The threat of overcapacity and price wars has eased a little due to these unforeseen circumstances and may have come as an opportunity for cement companies in the north to increase prices preliminarily. With local demand expected to grow month after month, especially in the north due to greater development expenditure, and an overall boost in housing and infrastructure projects; the price hike may not affect sales. Coal prices (South African export) landed at $93 per ton in Feb-18. If they shrink or even remain stable, given improving retention prices, cement companies may also recover their margins.