It wasn’t meant to be this way but warning bells had been rung some time ago. After a rough FY18 where a combined after-tax profits fell by 4 percent (read: “Cement: Playing Jeopardy”, Oct 5, 2018), the first quarter of FY19 does not bring any better news. The first to announce its results, Attock (PSX: ACPL) registered a 30 percent decline in its bottom-line and subsequently, Cherat (PSX: CHCC) saw profits fall by 29 percent in 1QFY19

Demand has been patchy—in the first two months of FY19, dispatches in local markets fell by 2 percent mainly because of a 9 percent decline in the north zone. Competition has soared all over as Cherat, Attock, Lucky, DGKC have all launched their new expansions while a host of other expansions are on their way. Price competition coupled with higher costs of production is giving cement companies a tough time.

Cherat’s luck has visibly turned on its head. This quarter last year, it had recently come up with its new expansion that had doubled its capacity which led to a massive surge in revenue—120 percent, to be exact in 1QFY18. In 1QFY19, Cherat is showing a 14 percent decline in its revenue year on year. This is a function of lower demand this quarter against a flourishing boost the company was seeing last year. In contrast, being in the south, Attock does enjoy some semblance of stability. Its revenue grew by 63 percent as demand and retention prices have remained steady. The company also added new capacity to its plants in Jan-18 which was not there this quarter last year, hence higher sales.

The companies, especially those in the north have managed to increase prices of their cement bags as much as they could. Toward the end of Sep-18, the average cement bag cost Rs591, against Rs563 in Jul-18 and Rs553 in Apr-18—that’s an increase of nearly Rs40 per bag. In fact, in cities like Islamabad and Peshawar, price for a cement bag went up by Rs70 per bag. Prices in the south were also raised but by within Rs20 per bag.

Greater prices however could only proof to be buffer. Gross margins for both have dropped by more than 30 percent—Cherat’s slightly more than Attock’s since it incurs higher inland transportations costs. Not only have coal prices been seeing an incline, the rupee’s falling value has also made imports ever more expensive. There was a dip in coal price from Jul-18 to Aug-18 of 7 percent but overall between Mar-18 and Sep-18, coal export price (Richard Bay) has grown by 14 percent. Couple that with the rupee depreciation, costs have soared. The dollar fetched less than Rs120 in Jun-18 but rose to Rs129 in Jul-18 and remained between Rs122-124 in Sep-18.

Indirect expenses as a share of revenues for both players have remained the same. If sales mix turn positively toward exports—given slowing local demand—distribution costs may rise going forward. Finance costs for Attock saw a slight uptick—2 percent of revenues in 1QFY19 (1QFY19: 0.3%) as borrowing costs for new plant kick in. As for nearly a third of profit decline, it could have been worse. Cherat’s bottom-line was shielded by a tax reversal while Attock also paid less effective tax—17 percent in 1QFY19 (1QFY18: 23%).

What binds the fate of the cement industry going forward are coal prices, rupee parity against dollar and local retention prices.If China continues to restrict supply in its new mission to protect its deteriorating environment, and global demand for coal grows as it is expected, coal mining companies abroad will be enjoying some neat profits but coal importers will see their costs balloon.

Meanwhile, if Pakistani local cement demand is curbed at the hands of simmering down of economic activity, especially in the real estate commercial sector, companies will not enjoy very high utilization which may lead to price competition. The struggle to safeguard free falling margins for cement companies, whether in the north or south, will continue. In that sense, Attock and Cherat seem to be on the same boat.