Cement recovery expectations

If the government has given tax relief to the cement industry in the form of FED reduction and GST savings (total impact of Rs14.5 per a 50-kg bag), it is because it promised the same under the Naya Pakistan Housing Program which is — in principal — planned to provide affordable housing across Pakistan. Whether that is possible or not remains another debate altogether. The more pertinent question however is whether government’s hopes to keep prices of cement bags down or construction costs at the same level as prevailing rates will actually materialize. Unlikely.

Analysts believe the likelier scenario is that cement manufacturers will raise prices as they had to take back price hikes earlier on the request of the government (read more: “Of stranger things”, May 15, 2020). Did the government cut taxes with a firm promise on price stability? Also unlikely. But even if such a promise existed, markets do not work that way. The latest news is that cement dealers have been holding cement stock in anticipation of a price hike by manufacturers which has created a shortage in the market in turn driving prices upwards.

There is a growing consensus among cement analysts that the industry is moving towards recovery, driven by positive growth in demand due to the construction package and potential demand coming from housing. Topline estimated that during June, demand would increase by 60-80 percent month-on-month while year-on-year, demand has gone up 26 percent after posting several negative growth months due to covid-19 and subsequent lockdowns. On cumulative basis, FY20 sales will remain at par or slightly up (1%) with FY19.

BMA Analyst Masroor Hussain argues that demand will further go up, while falling coal prices and FO prices have been improving margins for cement companies already. Profitability will further be boosted due to lower interest rates and since most of the cement manufacturers are carrying higher debt on their balance sheets on account of recent expansions, they will benefit from lower finance costs. Retention prices despite tax cuts are also expected which fall in favor of the industry’s bottom-line.

Even though the budget 2020 for Public Sector Development Program (PSDP) has slashed allocations and fewer new infrastructure development projects are in the pipeline, cement manufacturers maintain demand will preserve due to NPHP and increased private sector investment. Over the past month, demand has visibly grown from the private sector which will ultimately drive the industry over the next year, though government spending will continue to capture a major share of the total.