If cement manufacturers are worried, they should be. It is not that cement mills don’t have the capacity to churn out clinker to meet demand, because they certainly do, but the demand is very evidently not materializing like it had been hoped. It is also entirely possible that cement bosses are thinking long and hard before burning precious coal to produce enough cement to meet the demand. While the country was busy worrying about oil price rallies, coal has quietly become a rather expensive habit to keep. Cement industry being the largest user of coal, will bear most of the brunt.
During first quarter FY22, cumulative cement dispatches have fallen 5 percent with demand overseas for Pakistani cement slowly dying out. Exports fell 42 percent. If cement makers were merely balancing out the sales mix in favor of domestic markets, domestic dispatches during the quarter would have been higher. So, while sales in local markets grew 4 percent during the quarter, demand — that the industry has been hinging on — is just not robust enough. If that is indeed the case, and the industry is not deliberately rationing production, that throws a large wrench into industry’s financial forecasting.
Coal prices have grown dramatically, only exacerbated by the dramatic rally in container freight rates. For instance, coal originating from South Africa (Richard Bay) has increased by 140 percent in value between Aug-21 and the same month last year. Price hikes have been coming on strong since last year (read more: “Cement’s coal play”, Oct 5, 2021). Meanwhile, container freight rates have also been growing steeply since Jul-19. According to global container freight rate index, between Sep-20 and Sep-21, containers rate has gone up from $2,247 to $10,323. Baltic Exchange Dry Index that tracks and records freight costs for dry bulk materials such as coal and iron ore cargoes recorded a growth of over 300 percent (or 4.7x times higher) between September of last year and now. Amid all this, the rupee is also becoming weaker against greenback.
While supply-side snags hitting the global supply chain are expected to subside — it is not happening this year. In fact, nobody is counting on improvement in freight costs during 2022 which does not bode well for manufacturers that depend on imported inputs for production. Coming their way is massive cost inflation around which they would struggle to preserve margins.
If the first quarter numbers are any indication, the cement industry must deal not only with a costlier dollar, costlier coal, and costlier transport, but also with shaky domestic demand amid underconfident export markets not hungry enough for Pakistani cement. If domestic demand does not meet its promise, cement manufacturers will also lose pricing power in local markets which had been maintained thus far.
Cracks are appearing now in an industry that was on the way to recovery but alas, recovery was largely short-lived. Challenging times ahead.
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