Cement: All set up

In 2024, the government has budgeted a sizable federal Public Sector Development Programme (PSDP) which it intends to spend on development projects predominantly financing infrastructure for energy, railways, motorways and highways, aviation, and ports projects. This ought to be good news for the cement industry that has shrunk by 15 percent in the outgoing year, dispatching just shy of 41 million tons during the period down from last year’s 48 million tons. Of this, exports absorbed 10 percent of the total market share. But the industry must refrain from premature congraluations—the allocated too-optimisitc funds may never fully actualize.

Spending cuts in the past have happened more often than not, leaving utilization to trail below targetas the government of the time attempted to untangle itself out of a worsening fiscal crisis. Highly unlikely that an economy so far into a debt crisis starved for dollars will be spending Rs1.15 trillion in development—the highest ever PSDP allocation yet—when it has to pay off hefty sums of debt, servicing of which is piling up, and no IMF bail-out is at hand. The construction industry will be waiting a while to see demand ramp up.

Capacity utilization across the industry stands somewhere between 55-57 percent which is lower than any year in the past 15 years in record. At a time when capacity utilization is reduced to half, and new expansions are coming online, cement industry players typically enter into their warrior phase, warring on prices. However, pricing power is the only thing keeping most of them afloat and they are unlikely—in unison—to let go of it as demand remains taciturn. On the upside, costs of production may provide relief as interntional coal prices have come down. Procurement through imports has been difficult across the industrial sector because of the ongoing import restrictions but latest news on that front suggests the government—amid IMF pressures—is rescinding all import restrictions. Though naturally, without adequate shoring up of foreign reserves, the lifting of this ban may not yield quite the desired outcome. At an import cover provided by reserves of less than a month, the import ban would simply become unofficial but very much in place, allowing priority based imports only. In short, cement manufacturers may not get access to the desirable coal stocks in time, though eased restrictions will allow them to mix it up. Specially in the north, players will make prudent use of Afghan coal which has recently witnessed a reduction in export duties and taxes to match with the falling coal prices internationally. This will help improve their margins significantly. South players near the port will continue to utilize imports via sea through multiple sources to optimize their inventories.

Things will remain subdued on the demand front. Consumers facing high inflation are also facing reduced purchasing power amid growing taxes can absorb only so much of the incremental cost. Cement average price has risen 42 percent in the past year with similar price increases in other construction related commodities. For the average home builder, the costs are prohibitively high with no mortgages or formal financiers in sight. But cement industry has managed to make impressive profits despite demand slowdown owing to strong prices. With that move well in place, and coal costs coming down—for both south and north players—the industry is not in any threatening place, all odds be damned.