The cement offtake is back. For the most part of last year, the industry suffered on the hands of subdued demand, higher costs, and lower price retention which impacted profitability for the industry at large. It now seems that the sector has paid its dues. Cement dispatches by June had already started to return with year on year demand up 30 percent while in July, sales grew even more—up 40 percent year on year. That’s a great start.
The industry has had help as fundamentals have quickly transformed—toward the better. On the demand front, the increased focus of the government to spur the construction industry—a major employment generator—will be a driving factor for upcoming offtakes as the private sector takes a more dominant role in larger construction projects. In addition, the building of the Diamer-Basha dam will further add to volumes.
Incentives offered under the construction package announced by the PM will add substantial demand for cement and other building materials while the launch of the much-awaited Naya Pakistan Housing Program (NPHP) together with all its bells and whistles—tax cuts, housing subsidies, no questions asked policy—will grow demand. The recent budget also reduced the FED rate which would provide the industry a breather.
Exports may prove to be problematic through cumulative exports during FY20 went up 20 percent—primarily due to southern firms sending clinker abroad to key markets. In fact, during the fiscal year, clinker dispatches doubled which is a feat for the few players selling the commodity abroad. The real problem remains cement exports cross-border. India with a much smaller market share to begin with has closed its borders and growth has slowed in Afghanistan.
The industry has worked on reviving market interest in Sri Lanka, Bangladesh, Madagascar and Mozambique—though volumes to these markets are not as significant. This diversification would help as the Covid-19 situation becomes clearer. If all lockdown restrictions lift and the country moves toward normalcy, domestic demand will take care of any excess cement being manufactured. In the alternative, new markets being explored will come in handy.
On the costs front, lower coal prices, stable currency, and reduced borrowing costs due to falling interest rates will certainly help the industry to maintain and improve margins that had slid dramatically during FY20. Overall, investors are certainly sharing the optimism of the industry, if the stock market rally in cement scrips is anything to go by.
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