Latest FDI statistics in 8M indicate that the construction sector for the first time ever is taking the lead in FDI flows with the power sector taking a backseat as many early harvest projects under CPEC have completed. Power’s share of which coal is the primary contributor is now 15 percent of all FDI (8MFY18: 34%) against 22 percent for the construction group in 8MFY19. Though it makes sense that aside from power, construction is the other CPEC agenda on the docks, but does this takeover bring glad tidings to the construction sector? In fact, construction’s share in total FDI has also fallen marginally from 23 percent 8MFY18, registering a 26 percent decline in FDI year on year! If anything that is the opposite of glad tidings.

What these numbers indicate though is something most already know. There is no favours this year to the construction industry. Cement’s demand has been slowly descending with exports making up for the lost share in domestic market. In 7MFY19, cement dispatches fell by 4 percent in the domestic market, with exports growing by nearly 50 percent, occupying 15 percent share in total sales against 10 percent the period last year.

Cement’s profitability in the first half has been badly affected, not just because of the slowdown in demand, but the rising cost of production due to global upward movement of commodity prices (coal, coke etc.) and the depreciation of rupee. The latter has been a double-edged sword—making input costs more expensive, but make exports of cement in the global market slightly more competitive, which given the slowdown in domestic demand may just have been what the doctor ordered. Even so, exports still fetch lower prices than local markets which bode less well for manufacturers.

The industry is expected to get a breather on the cost front in the immediate future—no further depreciation on the horizon, while coal prices are forecasted to move south. However, domestic demand will remain slow. Federal PSDP has been 26 percent lower year on year in 1HFY19 and government spending toward PSDP much lower than the 10 percent average that the PML-N government maintained during its tenure. Private sector construction is also not as robust, especially since there is a moratorium on non-filers to purchase property.

Though exports to India have been falling, albeit slowly, with recent tensions between the two countries, it is safe to assume that the Indian market is no longer open for Pakistani cement. In 7MFY19, exports to India were 15 percent of all cement exports—that 15 percent will have to be diverted elsewhere, and so the overall demand takes another big hit.

Steel tends to follow similar patterns though it is also derives its demand from the automotive and white goods industries. According to data published by the Pakistan Bureau of Statistics (PBS), production of long products (used mainly in construction) such as billets and ingots fell by 21 percent in 7MFY19 year on year while flat products like sheets, plates etc. grew marginally by 2.8 percent. The latter have fed into other sectors like the automotives where passenger cars and buses have shown some growth. The message is clear. While there are some hopes that can be latched onto the Naya Pakistan Housing Program which will bring 5 million houses, existing demand indicates a sobering next few months. The housing plan will perhaps start to take any substantive shape beginning of FY20 but the government has to tackle a mountain of regulatory and administrative issues before any construction can begin to happen.