Cement: bracing up for FY12

FY11 has been quite a test for the cement sector of the country, thanks, particularly, to the floods that inundated a large area of the country last year and the slashed up PSDP expenditures.
While one hopes for the floods not to spell their wrath on the country again in the upcoming fiscal year, any promises of an increase in PSDP expenditures are only as good as on paper, since the actual outlays have consistently been less than the budgeted outlays in the past few years.
Therefore, even though the proposed PSDP expenditure of Rs730 billion in FY12 is higher than the budgeted Rs646 billion in FY11, industry players are not counting on that as an upbeat development for the sector because the actual PSDP expenditure may likely be less than the proposed budgetary allocation.
Still, actual PSDP expenditures in FY12 are likely to be higher than the previous year, thus increasing likelihood of some support for the sector.
On the other hand, whats actually sparked some hope amongst cement players are reported news regarding the cutback in the federal excise duty (FED) to Rs500 per ton from Rs700 per ton.
Though nothing concrete can be said about the proposal until the budget is disclosed on 3 June 2011, industry players claim that there is a strong likelihood for this measure to be adopted in FY12.
As retention prices will be lowered following the drop in FED, part of the decrease is meant to be passed on to consumers while part of it will help prop up cement companies profitability. The likely net effect will be an increase in cement demand and dispatches encouraged by the slide in prices, as well as an improvement in the sectors bottomline.
Though this is an encouraging development, cement players insist that FED should not be levied on the cement sector at all. "Cement is an item that encourages development. Penalising it by the imposition of FED doesn make sense," said Tariq Saigol, Chairman, Kohinoor Maple Leaf Group.
The cement sector has been pressing for further concessions in the form of reduced import duties on rubber scrap, which can be partially substituted for coal in a process involved in cement manufacturing. Not only would this lessen manufacturing costs for cement makers, it will also lessen the import burden on the national kitty since rubber scrap costs less than coal.
Freight subsidy is another sensitive area for the industry. While cement makers are hopeful that previous claims on freight subsidy from FY10 will be settled by the government, a recoup of the subsidy in FY12 - which was not provided in FY11 - is something that will lend a hand to the sector considerably.
The revival of freight subsidy is particularly critical for cement players in the north, who end up producing a surplus of the product and cannot send it via the sea because of high transport costs. "Theres a limit to how much can be exported to Afghanistan and India via land and northern cement players need to be supported to encourage exports further," Saigol commented.
Overall, while FY12 appears more promising for the industry relative to the previous fiscal year, the sector needs more incentives given the high need for construction work in the country and its potential to enhance employment opportunities.