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The cement industry is closing off the year at record high prices in both the north and south markets despite cement offtake plunging 22 percent in the Jul-Nov period year on year. Typically, reduced demand would coax the industry to drop prices and/or offload inventories by giving discounts. This hasn’t happened. Prices have only gone up with the average weekly price standing at Rs1,039 per bag, surging 48 percent in the Jul to Dec period thus far, compared to the same period last year when average prices were Rs700. Visibly, in the northern markets, the price increase has been higher—at about 51 percent—compared to the price increase in the south trailing 45 percent.

Demand has been abysmal, down somewhat due to reduced government spending but also because of the prohibitive cost of construction which is causing cost overruns and project delays in the private sector. Some demand slowdown has also come about due to floods. Demand pressures, therefore, have been mounting from nearly all directions, while exports also plunge. The sales mix is completely skewed toward domestic demand—exports have fallen to 9 percent of total offtake compared to 12 percent last year which was also historically low at a time when domestic demand had already started to show fatigue. In Fy22, local demand dropped 1 percent while exports fell 42 percent. In the 5MFY23 so far, exports have dropped 47 percent versus domestic demand sliding 19 percent. Traditional exporting markets for both clinker and cement have been less receptive. Due to price competitiveness, cement manufacturers would prefer to sell locally where prices are considerably more attractive.

In fact, strong pricing enabled the industry to record a pre-tax earnings growth of 11 percent despite demand plunging 25 percent in 1QFY23 (calculations based on 16 listed companies). Profitability may persevere yet for another quarter as prices have maintained their upward rally. Meanwhile, coal prices in the international markets have also been coming down, allowing cement manufacturers to optimize their costs by balancing a coal mix from different markets including Afghanistan. This will enable profitability too, though all other costs have been substantially inflationary. As long as prices keep facing upward, rising costs can be balanced out. But demand is a major threat, especially as new capacities come online and capacity utilization drops. Nearly all players have been expecting a demand slowdown, relying on prices to manage margin security. But soon price competition may ensue as capacities far exceed offtake.

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