Cement: Better days

Cement prices have soared nearly 45 percent in the Jul-Mar period of this fiscal year compared to the same period last year—an average taken of weekly prices recorded by the Pakistan Bureau of Statistics for key markets the Bureau captures. Demand, however, has befallen rough times, dropping 18 percent in the cumulative period of 9MFY23 versus this period last year, where domestic offtake slid 15 percent and exports plummetted 35 percent—the latter’s share in total dispatches shrinking to 9 percent compared to 12 percent last year. This is not very dissimilar to the first half, where total offtake had dropped 21 percent, but most cement companies still turned over a positive earnings growth. 9M would not be too different.

The revenue growth has been phenomenal in the first half despite the reduction in demand primarily because of rising prices. Though energy costs, fuel prices and overall inflation has been increasing, cement companies have protected themselves from it through energy effeciency plants, increased captive power, and better inventory management. Calibrating plants to utilize coal supplies from Afghan and local sources when international coal prices were rising was also able to shield cement manufacturers—specially those located near the border—from import restrictions that have forced many a producers to face input shortages. Average margins for the industry stood solidly at 25 percent in the first half. Though Afghan coal did become pricier over the past few months, cement manufacturers could not move back to coal procurements from abroad which have been witnessing a drop in prices internationally due to the ongoing LC crisis. Even so, better inventory management, and subsequent price hikes will continued to have served well into the third quarter of the fiscal year.

Recent price hikes have resulted from higher FED and other taxes which may not bode too well for retention in the third quarter, but will remain mostly positive for the cumulative nine-months performance. The challenge for some cement companies, specially those with higher debt component as they went into expansion, will be substantially higher finance costs, at a time when interest rates have not stopped surging. This will keep earnings growth in the third quarter muted, though nothing too discouraging.