Despite a visible slowdown in demand; mostly coming from a dramatic drop in exports, cement manufacturers have retained reasonable growth in earnings during 9MFY22 with prudent cost management, also having raised cement prices in the market slowly but surely to keep up with escalating costs. Domestic demand during the period remained the same as last year which shielded the blow to the top-line to a certain degree caused by the sharp decline in exports of 33 percent. Exports share dropped to 12 percent in 9M with the last recorded month of march during the current period witnessing an exports’ share drop to 6 percent.
Cement manufacturers prefer to sell domestically where they enjoy greater pricing power; shipping or trucking off excess cement to markets in the neighbouring countries (predominantly Afghanistan) or overseas depending on their proximity to a shared border or the sea port. When domestic demand drops, exports share takes on a bigger share of the sales mix but when domestic demand is expanding, exports share begins to shrink. This year, both domestic and export demand have disappointed due to a variety of reasons. Despite the ousted PTI government’s construction amnesty scheme that incentivized builders and constructors to register construction projects with the FBR and enjoy numerous tax benefits, the announcement of the mega housing project under which thousands of homes were supposed to be built and a mark-up subsidy announced for new home buyers, cement demand has been lacking in lustre. One major reason is the rising inflation and fast ballooning cost of construction, of which cement is a big component. While cement prices have been raised several times, steel prices have been raised several times manifolds causing construction costs to become prohibitive. Government planned construction projects have been underway but inflation may have thrown a wrench in the plans of many potential private sector projects. Demand for cement, as a result, remained flat.
Cement manufacturers have had to raise prices due to the commodity super cycle current underway as a side-effect of the ongoing Russia-Ukraine war. But the fuel inflation began much earlier when covid-restrictions across the world lifted and demand for commodities surged. Cement manufacturers importing coal had to find alternative markets for their coal needs which had a more delayed response to the global coal price rally. Afghan coal came to the rescue, which was about 20-30 percent cheaper. This provided a buffer for cement manufacturers on the cost front. However, Afghan coal prices have also been on the rise lately. Savvy cement manufacturers have invested heavily in alternative energy technology such as waste-heat recovery, refuse-derived fuel (where energy is generated by burning municipal waste), tyre-derived fuel (using tyres for energy generation) or even captive power that uses multiple fuel options. This has brought down costs of production for these manufacturers, but coal remains a primary need for them still.
As estimated here, both revenue and costs of sales per ton sold grew by 38 percent. This allowed margins to sustain at last year’s level in 9MFY22. And even though, overheads and finance costs as a share of revenue were cumulatively lower for the industry during the period, the decline in “other income”—which contributed 25 percent to the industry’s before-tax earnings in 9MFY21, dropping to 17 percent during the current period—caused net margins to drop by 9 percent for the industry, cumulatively. Notably, Mapleleaf cement’s other income dropped from 59 percent of its before-tax profits to nil in 9MFY22.
Coal prices due to the war situation may not find reprieve in the global market while Afghan coal because of growing demand is also becoming expensive, so while the shift to Afghan coal was quick-thinking and yielded results, this may not be very sustainable. This is specially considering the weak outlook on exports (read: “Cement exports dire”, April 18, 2022) and domestic demand; the latter mainly because of the continued inflationary scenario in the construction industry. Cement manufacturers may have to keep raising prices to secure margins but will lose on volumetric sales which may be a tolerable trade-off to a certain level.