Freight subsidy: key for cement sector

As budget day draws closer, cement makers, along with other industries, are lobbying with the government over the extension of inland freight subsidy into the next fiscal year.
With supply glut in local market, which is seen continuing into the next fiscal year on account of lower PSDP allocation, cement makers are relying on export growth to improve profitability.
The federal component of PSDP for the fiscal year 2010-11 is expected to be around Rs280 billion against Rs446 billion allocated in 2009-10. In fact, next years allocation is even lower than actual development spending in FY10, that was slashed to just Rs300 billion.
Moreover, the domestic industry faces a threat from rising indirect taxes as the revenue starved government is looking to increase Federal Exercise Duty to Rs900/ton next year from the existing Rs700/ton, in case VAT is not implemented. Special Excise Duty is also expected to inch up to 2 percent from the present 1 percent.
Offsetting the impact of damp domestic climate, growing cement demand in Sri Lanka, Iraq, and African countries provide ample opportunity to pass on the excess supply. Major cement players have so far remained successful in increasing their presence in these economies.
On the other hand, improving relations with India also bodes well for cement exports since Indian construction demand is likely to witness significant growth over the next twelve months.
Therefore, all the undergoing haggling efforts by the industry revolve around the continuation of inland freight subsidy which is in the interest of cement producers, especially for manufacturers in the north.
About 80 percent of total cement capacity is situated in northern parts of the country whereas almost 70 percent of cement export activity is conducted through sea route. This inland freight subsidy, therefore, enables northern manufactures to save around Rs400/ ton in transportation cost.
Stakeholders are pretty confident about the extension of this facility, which makes a few cement stocks a good buy at current price levels, according to some sell-side analysts.
But in case, the freight subsidy isn offered next fiscal year, cement makers could be in for a long haul.