Cement: Demand scenarios

The cement industry has seen a few dramatic ups and downs over the past two or so years, hitting close to 5 million tons in a month for the first time in Oct-19 and surpassing that mark the next year in the same month. But trouble crept in when this fiscal year kicked in and dispatches plunged almost immediately. Floods certainly had a little something to do with it but the ballooning cost of construction has certainly caused demand to become more cautious. Other than already funded construction and infrastructure projects, much of the construction activity has been at a standstill, and prices of steel, cement, and other building materials may have had something to do with it. Consequently, in the first half, total offtake has dropped 21 percent, with a marked drop in exports (down 56%) and a lower but more concerning decline in domestic offtake (down 17%).

The industry is evidently struggling in both markets. The six-month average offtake number for FY23 so far has been the lowest since FY17 despite the capacity in the industry is much higher since then. Exports’ share has dropped to 7 percent of total dispatches this year thus far against last year’s 13 percent. In Dec-22, the share dropped to 5 percent. However, Pakistani exports (measured by dollar per ton sold) are fetching better prices this year than in FY22 and FY21. This may be depreciation coming into play but it also means that Pakistani cement may be more expensive than cement sold by other dominant players such as Iran and Vietnam in key markets for Pakistan such as Bangladesh and Afghanistan. Iran has certainly found a foothold in the Afghan market while Vietnamese cement has been gaining market share in Bangladesh. Afghanistan has been struggling to maintain normal banking connections and Afghan traders are unable to buy dollars to pay for goods in the post-US exit scenario, Bangladesh has been growing its imports of cement raw materials including clinker which Pakistani manufacturers could tap.

But it is very clear that exports are not a massive threat for Pakistani cement makers who are strategic enough to maintain a sales mix that would optimize their topline. After all, in the first quarter of the fiscal year, the industry performed incredibly well despite dropping offtake. Dispatches go where there is more pricing power, and cement manufacturers have been selling as much cement as they can to the domestic markets where demand is sobering but still enduring.

The cement industry is expanding which necessitates domestic offtake picking up; otherwise, price competition may put a profound end to the current earnings growth. But demand recovery is not on the horizon; at least not just yet.