Cement: Dangers loom

Predictably, cement demand keeps on falling, getting a beating not just in the foreign markets but also in the domestic demand. In 11MFY22, total dispatches have fallen 9 percent (local: 2%, exports: 42%) year on year where the past two months have really tested the patience of cement mills. Demand in the north and south zones are drying up as government pinches its purse and reduces development and infrastructure spending. Constructors and builders meanwhile have to contend with sky high steel prices that have risen dramatically due to mounting steel scrap prices in the global market. Cement manufacturers have followed suit in the price hikes as their cost of production becomes prohibitive.

Coal prices in the global market have had their biggest rally as the Russia-Ukraine war took the world by the storm. While north mills in the country were able to switch to more affordable Afghan coal, high freight and transport costs (given also the rising prices of petrol) make it infeasible for south mills to procure Afghan coal. These mills have had it worse as their overseas exports—which some smaller companies relied on—have dropped considerably due to high freight rates. Exports in 11MFY22 have dropped 42 percent year on year, landing at 11 percent of total dispatches compared to 17 percent last year. For north players, cross-border and regional exports have fallen prey to poor and worsening economic conditions. Sri Lanka has defaulted on its loan and Afghanistan is still undergoing its transition as US forces left ground. Uncertainty in these markets looms as Pakistani cement exports struggle to keep up with what they delivered last year.

Domestic housing and construction demand has been thwarted due to higher inflation. With the PTI ouster, the future of Naya Pakistan Housing Projects does hang in the balance. Unfortunately, the last updated numbers for housing and construction loans under Mera Pakistan Mera Ghar (MPMG) is for back in Feb-22. With policy rates revised up several times, the subsidy cover under MPMG would not be enough to make housing finance “affordable”.

A number of cement companies are undergoing expansions, and focusing on waste heat recovery and fuel efficiency to cut down on their costs but with demand not in their favour, cost efficiency can go only a certain way. Cement industry is not going to be doing well over the next few months, and it is unlikely that the government would slash any taxes and duties on the good as it kicks into austerity gear.