AIRLINK 62.48 Increased By ▲ 2.05 (3.39%)
BOP 5.36 Increased By ▲ 0.01 (0.19%)
CNERGY 4.58 Decreased By ▼ -0.02 (-0.43%)
DFML 15.50 Increased By ▲ 0.66 (4.45%)
DGKC 66.40 Increased By ▲ 1.60 (2.47%)
FCCL 17.59 Increased By ▲ 0.73 (4.33%)
FFBL 27.70 Increased By ▲ 2.95 (11.92%)
FFL 9.27 Increased By ▲ 0.21 (2.32%)
GGL 10.06 Increased By ▲ 0.10 (1%)
HBL 105.70 Increased By ▲ 1.49 (1.43%)
HUBC 122.30 Increased By ▲ 4.78 (4.07%)
HUMNL 6.60 Increased By ▲ 0.06 (0.92%)
KEL 4.50 Decreased By ▼ -0.05 (-1.1%)
KOSM 4.48 Decreased By ▼ -0.09 (-1.97%)
MLCF 36.20 Increased By ▲ 0.79 (2.23%)
OGDC 122.92 Increased By ▲ 0.53 (0.43%)
PAEL 23.00 Increased By ▲ 1.09 (4.97%)
PIAA 29.34 Increased By ▲ 2.05 (7.51%)
PIBTL 5.80 Decreased By ▼ -0.14 (-2.36%)
PPL 107.50 Increased By ▲ 0.13 (0.12%)
PRL 27.25 Increased By ▲ 0.74 (2.79%)
PTC 18.07 Increased By ▲ 1.97 (12.24%)
SEARL 53.00 Decreased By ▼ -0.63 (-1.17%)
SNGP 63.21 Increased By ▲ 2.01 (3.28%)
SSGC 10.80 Increased By ▲ 0.05 (0.47%)
TELE 9.20 Increased By ▲ 0.71 (8.36%)
TPLP 11.44 Increased By ▲ 0.86 (8.13%)
TRG 70.86 Increased By ▲ 0.95 (1.36%)
UNITY 23.62 Increased By ▲ 0.11 (0.47%)
WTL 1.28 No Change ▼ 0.00 (0%)
BR100 6,944 Increased By 65.8 (0.96%)
BR30 22,827 Increased By 258.6 (1.15%)
KSE100 67,142 Increased By 594.3 (0.89%)
KSE30 22,090 Increased By 175.1 (0.8%)

As cement companies consolidate their annual financial results, two things are certain. They would not be boosting very strong margins as they were in FY16, and they would not be looking forward to FY20 as they were that year. Expectations, like margins have inverted. Depleting confidence is also reflecting in the industry’s dividend policy (Read: “Cement: (Lack of) confidence signaling”, Aug 30, 2019).

The industry started making expansion plans soon after the then-government signed CPEC agreements with the Chinese government which was all set to make Pakistan an integral part of its one-belt-one-road project. This meant massive expenditure in energy and infrastructure. The government at the time was also committed to deploying large amounts toward development. This translated to strong growth in domestic demand in construction. An expanding economy also meant more private sectors spending in real estate development.

The strong demand continued well into FY18 but the sector started to face other factors that affected profitability. As expansions came through, price competition grew which led to lower retention prices in many northern markets and to a great extent, volatility in others. Exports at the time started to shrink as well, particularly from the Afghan market which was witnessing an influx of cheaper Iranian cement. As the industry entered FY19, energy prices were higher while rupee also took a nose dive. It lost nearly 34 percent of its value against the dollar that made imported inputs such as coal more expensive. Average coal prices during FY19 also fared higher than previous years ($93 during the year, against $87 per ton during FY18). Companies that managed their inventory and coal contracts better, were able to perform better too.

Domestic demand slowed down during FY19 as government spending dried up and private sector development halted due to regulatory crackdown (such as restriction on non-filers to purchase property or Supreme Court ban on high-rise construction etc.). Financial performance also depended on location. Cement manufacturers in the south have managed far better—both in terms of price stability as well as dispatches. Proximity to the ports and higher cost incidence has recently allowed players in the south to revert their production toward markets overseas. Though demand for clinker has been found to be higher which while could still be exported fetched much lower prices than cement. North zone’s exports avenues have dwindled as Indian market shut down on account of political tensions and Afghanistan also became less receptive.

These demand-cost scenarios have resulted in average gross margins—so far—to fall to 25 percent reminiscent of earlier 2010-12 periods. Profitability for many companies will be slashed due to higher finance costs (as a share of revenue) led by increased expansion led borrowing and higher cost of borrowing due to rate hike.

Certainty is aplenty, and it is telling a somber tale going forward for many cement manufacturers. If production could be routed toward market overseas, revenues will continue to grow, but margins may not improve as cost pressures coupled with price competition—both locally and globally—picks up heat.

Copyright Business Recorder, 2019
 

Comments

Comments are closed.