It is clear from the financial statements of cement companies in the first quarter that all hopes and dreams of the industry hinge on domestic demand. The biggest reason for the industry’s current profitability—against all odds—is cement manufacturers getting back their pricing power in the domestic market. Strong retention and a higher margin sales mix with exports pushed into the background, though not by design, ended up shoring up cumulative industry earnings by 133 percent, despite a drop in overall dispatches by 6 percent.
Domestic dispatches grew slightly by 4 percent amid exports dropping by 44 percent; of which clinker exports dropped 54 percent (read more: Cement: Trouble brewing, Oct 6, 2021). With Afghanistan going through a massive political mayhem, and cement importers in markets overseas grappling with sky-rocketing freight costs on top of global commodity prices spiralling out of control, exports slid to 12 percent of industry’s total sales, a massive drop from 20 percent share.
Cost related warnings bells had been rung. The supply-chain crisis brought on in the aftermath of covid hitting the world had sent freight costs hurtling forward. As earlier cited: according to the global container freight rate index, between Sep-20 and Sep-21, containers rates went 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.
Cement millers also had to quickly calibrate plants to domestic and Afghan coal to cushion the blow from global coal prices. Coal originating from South Africa saw its value increase by over 200 percent between Sep-21 and the same month last year. For the sake of comparison, the average coal price during 1QFY22 grew by 177 percent compared to the same quarter last year (though, this does not show the accurate impact on cement manufacturers as they import coal months in advance). Nevertheless, the switch to domestic/Afghan coal had to happen, despite the lower quality. In the process though, cement makers were able to also avoid the rupee depreciation affect.
Cement manufacturers were able to slowly increase prices in various markets as demand remained consistent, if not very strong. It had to be done (read: Cement prices: Tug-of-war, Oct 11, 2021). On average, cement prices in domestic markets went up 20 percent in 1QFY22, though evidently, companies were able to make the best of it. Revenue per ton sold (estimated based on data available) for the industry actually grew by 31 percent which is outstanding. Cement millers stopped giving discounts and started selling in the right markets; the plan worked.
Gross margins as a result grew to 25 percent with several top players landing their margins at or close to 30 percent (all eyes on Kohat boasting 33% gross margins). Overheads remained intact while finance costs dropped for the industry due to a reduced interest rate during the quarter. The cement companies have also been doing remarkably well in terms of non-business income due to better cash cycles and better interest rates. Cumulatively, this stood at 15 percent of before-tax profits.
But while the industry stands tall right now—and in fact, financial statements have far exceeded expectations given prudent and quick procurement of inputs whilst managing the risks that came into play—if domestic demand does not pan out the way it is supposed to, things will get less than rosy. This is primarily because exports are not going to revive very soon. Cement companies also cannot keep raising prices unless demand remains intact or keeps growing. This means, the current victory on the top-line driven by better pricing is not sustainable without continuously growing domestic demand which has displayed signs of lethargy in the past few months.
Companies have piled coal inventories for use in the next quarter which will help until coal prices in the global market start to cool down, as is expected. And cement prices have recently been increased again. Both factors provide surety for a positive second quarter but what happens from thereon will rest on cement buyers, and how eager they are. More on that later.