The negative consequences of lower cement prices and higher interest charges on cement industry are finally becoming more obvious, as Maple Leaf Cement knocks its creditors doors to restructure the payment schedule of Rs8 billion worth Sukuk bond issued in 2007.
The industry is under high cost pressure due to lower cement prices, since the start of the current financial year. The magnitude of price reduction is much higher in the northern region, where Maple is located, compared to southern region, due to lack of export avenues through land and high in-land tariff charges that result in excess cement supply in the region.
While the rise in petroleum, coal and gas charges in the past two years has dented its margins at one end, high interest rates combined with loss on fair value measurement on cross-currency swaps have weakened the companys payback ability at the other.
It is undeniable that current cement crisis has eroded the firms ability to meet near term payment but a number of market indicators suggest the worse is over with recovery seen in the medium-term - implying that debt restructuring might not prove too costly.
First, sluggish activity in domestic construction industry is expected to gather pace after winters; and second, the likely decrease in interest rate going forward would lift a bit of financing burden as well.
The companys gross margin has already been showing signs of improvement of late, rising to 32 percent in 2009 from 16 percent and 8 percent in FY08 and FY07. The first quarter of current financial year also saw reduction in post-tax losses to 175 million compared to a loss of Rs278 million in the same period last year, despite lower cement prices.
And this trend is likely to continue ahead, as MLCFs Waste Heat Recovery Plant is expected to commence operations in February 2010 and will produce approximately 15MW of inexpensive electric power, which would reduce cost pressure from its margins.
Meanwhile, according to sources, Saigol group, the companys sponsors, is planning to inject funds in the company, to improve its financial health and help manage the firms debt. The exact size and form of the injection, however, is yet unknown.
But, while MLCF may be unlikely to default on the back of bettering dynamic, the debt problem may, nevertheless, be signaling similar pressure in other industries. Perhaps it won hurt too much to be cautious before investing in banks and income funds.
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