The dynamics operating across the north and south zone within the cement industry couldn’t be more divergent, which undoubtedly, sets the tone for the upcoming months as economic fundamentals improve. Though, overall, the industry has swiftly turned into profits from losses this quarter last year, different factors have contributed to the performance of the two zones.
For instance, price retention has all but remained constant in the south zone as domestic demand was much slower. Companies have done well on the back of clinker exports which pushed revenue per ton sold downwards. If the same (clinker or cement) was being sold locally, retention and revenue per ton sold would have improved; profitability buoyed further by the two factors.
The opposite is the case for cement companies in the north where prices have markedly improved and sales have skewed toward domestic markets which allowed revenue per ton in most cases to propel upwards; remaining a positive driving force for the top line in all cases recorded.
Evidently, greater exports would lead to higher distribution costs against revenues. But aside from Attock that sold nearly 70 percent of its dispatches overseas, overheads as a share of revenue for companies across the board—on average—declined during the quarter. This denotes a tighter fist on administration expenses—down 3 percent cumulatively for the industry.
Coal prices globally have declined 20 percent on average during the quarter against the same period last year, but the greater benefit accrued would be by companies closer to the ports. Gross margins improvement however seems to have balanced out for north and south players—the former winning on better retention and the latter on offtake and landing price of fuel costs.
When it comes to demand, the existing trend will amplify as the industry moves into a growth spurt phase. Conversations with stakeholders and relevant agencies indicate that though it has revived across the country, most of the new construction happening—whether it is under the Naya Pakistan Housing Program with private and public sector projects or private investments under the construction package are mobilizing in the north of the country.
That makes sense since PTI does not form government in the south and boosting construction investment in the region, particularly Karachi will be that much harder given provincial government motivations, or lack thereof. Regulation is an important component for the construction industry and without provincial support, it can go nowhere.
To be fair, the PPP government does not seem too eager to lend support to part of their own original slogan “roti, kapra, makaan”, just because the idea was floated and pushed by the federal government and not them. If that remains the party’s official line, Naya Pakistan Housing Projects will fall heavier in the north zone and will generate construction materials demand in those areas, leaving much of south behind.
Dam construction and other infrastructure projects will also increase demand in the north. If the Karachi Transformation Plan materializes however, that would be one feather in the hat of the southern region and will increase cement/steel demand in the region. But how soon that would start is a big question mark.
It so seems that cement companies primarily operating in the south will be selling low margin clinker to markets overseas while much of the spoils of the government’s construction impetus will be enjoyed by the players located in Punjab and KP.
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