Cement prices re-emerge

Amid rising demand, cement manufacturers located both in North and South zones are raising prices. The price of a cement bag—on average across markets—has gone up by Rs30 since last month (according to spot prices data reported by PBS) and by Rs 85 since Nov-20, though by no means, this price increase is unexpected. Prices fell considerably last year during months leading up to the covid-linked lockdown and since have been slowly but steadily improving.

The other important trend that has materialized is the shrinking gap between prices in the north and south zone. There are few players in the south and prices are typically stickier while competition is more intense among cement manufacturers located in the north which leads to prices remaining in constant flux. But with growing demand, cement manufacturers up north are more comfortable in raising prices, knowing that cement is becoming precious in the market.

Global coal prices have also contributed to this push mostly influenced by China that sets the tone for international coal price dynamics. That country’s growing demand is fed by domestic production of coal as well as a large quantity of imports. For the past year, mounting demand against supply shortages have pushed prices to the brink, at their highest levels yet.

Pakistan imports coal mostly from South Africa (some is also imported from Indonesia and Australia, though the latter is even more expensive). Imported South African coal prices have increased by 25 percent between Mar and Jun-21. In the past year, the commodity has nearly doubled in value which together with higher freight is putting pressure on production costs (read more: “Coal rush”, July 9, 2021). Some manufacturers may be exploring coal import opportunities close by like next-door Afghanistan, though the quality of Afghan coal is suspect which may leave cement companies at the mercy of global coal price fluctuations.

Analysts expect these prices to stabilize in the last quarter of the calendar year as China’s demand begins to satiate on the back of rising production levels and temperatures cooling down. However, cement manufacturers have likely procured coal for the next two months at prevailing costs which means both north and south players would further increase prices by another Rs20-30 to make up for costlier fuel. Right now, a cement 50-kg bag costs about 66 percent of the cost of imported coal of the same quantity (accounting for the exchange rate). Though the quantity used is not 1:1, historically, domestic price of cement has never fallen below 70 percent of imported coal price (equivalent quantity).

It only helps that demand projections are strong as construction of hydro power projects ramp up and stalled development projects pick up steam. The projects under Naya Pakistan Housing Program (NPHP) will likely begin construction activity this year which is keeping hopes high on the demand front. Even if cost pushes prices north, confidence in demand and absence of imports puts cement manufacturers at a pretty sweet spot in the domestic market in order to keep margins secure.