The cement industry is demonstrating a remarkable recovery from losses to profits after demand in the country had a colossal reawakening. The industry has had a better year from every perspective: whether it is demand, retention prices, production costs or financial costs. Gross margins have re-entered the double-digit zone while profit margins turned green from a decided red this time last year.
One can only speculate the origins of demand as cement manufacturers rarely sell directly to projects. No doubt, the construction package announced by the government in the midst of the Covid-19 outbreak has reigned in considerable interest from builders and developers eager to bag the amnesty scheme (no questions asked on source of funds) that comes with a fixed tax regime (FTR). However, it has been difficult to track progress of the package (or the Naya Pakistan Housing Program for that matter) as the FBR has provided precious little specificity on the 389 projects registered under the amnesty thus far.
While several projects under NPHP have been announced (and approved), construction has not entirely begun. Industry sources suggest the current domestic demand is coming mainly from stalled construction projects that have been revived (particularly in Karachi), infrastructure and development projects as well as dam/hydro-power projects that have been greenlit by the government.
Volumetric growth in the domestic market has been up 16 percent in 1HFY21 while exports have maintained a 17-18 percent share in total dispatches for the industry. Including clinker exports, total dispatches for the industry have grown 15 percent. This reflects in the stellar performance of major cement companies (for the purpose of this analysis, 12 out of the 16 cement companies listed on the stock exchange have been selected).
In 1HFY21, the industry raked in after-tax profits of more than Rs17 billion against a combined loss of around Rs930 million this period last year. But a lot more than demand had to change for this turn-around to truly emerge. Retention prices improved as offtake grew and though overall sales mix has not changed too much — exports have maintained share in total dispatches — the consolidated revenue per ton sold for the 12 companies grew 8 percent year on year.
Companies have evidently sold at better prices locally — average prices of cement bags in the last quarter went up 5-6 percent compared to the previous quarter. Average coal prices have also been lower — in 1HFY21, average (South African) coal price stood at about $64.5 per ton, 4 percent lower compared to $67.45 per ton in 1HFY20. Accounting for a lag of about 2 months, average coal prices actually cost 10 percent less for the companies during the present period against last year. Energy efficient plants through waste recovery together with lower fuel and coal prices allowed the combined costs per unit sold to drop by a phenomenal 10 percent.
Meanwhile, policy cut from 13.25 percent to 7 percent allowed financing costs to shrink considerably as well — specially for companies that were heavily leveraged. Several companies (DGKC, Kohat, Lucky, MapleLeaf) in the industry have announced expansion projects and are availing reduced mark-ups under SBP’s Temporary Economic Relief Facility (TERF) that came in March last year. Other companies may follow and this may be a prime time to do so as Kibor is still low and capacity utilizations may start to peak soon.