Cement: Sorry tale

Cement offtake has remained weak for the most part this year as construction demand has taken a significant hit this year. As the government grapples to put out the multiple fires that have been ignited on the economic and political front, development expenditure has taken a backseat. Floods already caused demand to slash substantially in areas most affected. Meanwhile, the cost of construction became near prohibitive causing cost overruns for many projects. In 7MFY23, cement offtake has dropped 18 percent, of which local dispatches dropped 14 percent while exports nearly plunged 46 percent year on year.

A 14 percent drop however is still not the worst news, though the average offtake for FY23 thus far is the lowest since FY17. As inflation ravages the country, cement manufacturers have kept prices elevated which bodes well for their balance sheets right now as they can still turn profits despite reduced demand. What would make it more troubling is when consumers stop absorbing the price and demand truly plummets. At such a time, manufacturers would bid to sell off excess cement in any market they can compete on prices, which in turn, would threaten their margins. But this is at a time when key export markets (such as Afghanistan, Bangladesh, Sri Lanka, etc.) are undergoing their own set of political and economic challenges and are less receptive to imports. Exports share in 7MFY23 has slipped to 8 percent of total dispatches from 13 percent last year.

The other major threat is the supply of coal. The dollar shortage and the accompanying wrath it has brought with it has halted most imports into the country. Coal supplies from markets abroad will dwindle which is unfortunate as global coal prices have been moving downward and would have helped shore up margins. Though cement manufacturers have the option of utilizing domestic as well as Afghan coal, these varieties are becoming more expensive. One may expect some flood-related reconstruction and rehabilitation to begin soon which could soften the demand slide but it would be foolhardy to rely on that as government attention is very clearly occupied elsewhere. Lastly, the construction industry is closely interconnected. The steel industry is undergoing a shortage in many of its inputs due to the import restrictions—when steel supply plummets, demand for cement will further get squeezed.