Cement prices have been under immense pressure in the past few months, mostly heading south due to increased competition as construction demand has considerably receded. Cement companies, particularly in the north have been racing to market to sell off excess production units while companies in the south have been selling off cement and clinker overseas. Between end of Jan and last week, cement prices on average have dropped by Rs68 per bag.
Based on weekly data reported by the Pakistan Bureau of Statistics (PBS), Multan, Lahore and Islamabad have witnessed the steepest decline in prices—within two months, they have lost between Rs100-135 value to their 50-kg cement bags in nearby markets. Majority of this drop has come in during the months of April and May (see also: “Cement cartel: Do not resuscitate”, April 11, 2019).
https://www.brecorder.com/2019/04/11/488084/cement-cartel-do-not-resuscitate/
Domestic demand is suffering due to the slowdown in public infrastructure and the real estate development market reinforced by cuts in developing funding and expenditure, and a thawing of the property market as ban on non-filers to purchase property were reinstated by this government. Since majority of the cement demand is in the northern region—Punjab and up—the slowdown has also hit them more.
On top of that, the exporting markets for these companies have dried out. India has all but halted trade with Pakistan, slapping hefty duties on Pakistani goods, while Afghanistan has become more and more difficult to penetrate. Pakistan shares not only borders but also deteriorating political relations with both these countries. As a result, trade suffers. In the case of Afghanistan, demand there is being met by Iranian cement as the country builds its own capacity to manufacture cement.
Evidently, prices in the south have remained unchanged. Though real estate developers have argued that the ban on non-filers and restriction on high rises have put a dampener on construction demand in the south as well, particularly Karachi. Many projects are on a halt until the business environment becomes conducive to building even after the high rise ban was lifted. Even so, cement companies have been selling off clinker overseas where they fetch lower prices than both cement exports and domestic sales but still manage to keep their plants running.
In its latest note, BMA Capital has noted that prices have now started to increase by Rs20-25 per bag across different cities in the northern region with the new price range standing between Rs450-550 per bag. This improvement has been possible with supply adjustments. Cement companies are trying to save their fast depleting margins.
However, even with a recovery of these prices may not be a huge development for cement suppliers. The recovery is marginal—it is still less than 20 percent of the total price decline that came in the past two months. Moreover, the tough times will get tougher as the country prepares for the upcoming battle—the new budget. Expectations are rife that there will be another increase in FED while fuel tariffs will also be higher. BMA Capital speculates that there will be a higher customs duty on the import of coal. These changes, particularly the duty on coal, would wreck cement manufacturers and as a consequence consumers, which would in turn further shrink demand. Summers are going to be sweltering, both literally and metaphorically.