Cement still in check

Costly construction and declining consumer buying power, together with cuts in public sector spending has dampened demand for cement, steel and other building materials, and it shows in annual statistics. Cement offtake during the year in the domestic market dropped 16 percent while exports during the year declined 14 percent—together cement industry contracted by 16 percent during FY23, with exports share remaining constant at 10 percent same as last year. Compare this to the first half of this year when exports were doing phenomenally bad by comparison—domestic demand had declined 17 percent in 1H; exports dropping by a whopping 56 percent, which brought the combined offtake decline of 21 percent. Exports began to improve after hitting a low at the half year mark.

In Jun-23, the contribution of exports in total cement dispatches had grown to 14 percent (from 5% in Dec). This has helped the capacity utilization from plummeting, at the moment, floating around the 55-57 percent mark. The domestic demand struggled to grow pretty much throughout the year, maintaining the same lull while exports began to improve as it became viable to send shipments abroad. The monthly average for domestic offtake in FY23 is about the same as FY19 and FY20 and lower than FY18, FY21, and FY22 and slightly above FY17—evidently, FY23 is middle of the road unremarkable.

At the same time, cement companies have turned decent enough earnings owing to really strong and continued pricing power in the domestic market. If costs of production have grown, cement manufacturers have made sure to pass them on to the buyers, and projects that have needed cement have just had to deal with cost overruns that they have already experienced owing to prevailing inflation across the board for most commodities. This is why, despite reduced demand, companies have seen a robust growth in revenues. In 9MFY23, cumulative revenues for listed cement companies grew 26 percent, amid a decline in volumetric sales (in tons) of 18 percent. The revenue per ton sold at the time grew 53 percent which is impressive. On the cost side, companies have been making timely decisions when it comes to fuel procurement shifting to domestic coal supplies mixing it with Afghan coal trucked in through the borders. This helped them to shield their margins from shrinking as international coal prices shot up. This also enabled the industry to mostly stave off the import restrictions that have been badly bruising the supply chains of domestic industries. However, cost inflation could not be ignored. Costs per ton sold during 9M had increased 51 percent, indicating a slightly lower increase in costs vs. cement retention prices; but just. As a result, margins (for the industry) in 9MFY22 stood at 25 percent, growing to 26 percent in the nine-month period this year.

In the full-year, sales have declined by less—at 16 percent, while price increases have continued. Since exports have occupied a higher share in total sales and they fetch lower prices, companies may lose some of the steam they had maintained for the first nine months, but they are not doing as bad they could have, by any measure.

Though the government had budgeted a record high number for public sector development program (PSDP), budget cuts are not out of the norm. Meanwhile, demand in the private sector may not improve too much given rising inflation and higher taxes. However, cement manufacturers have the opportunity to continue improving their margins as Afghan coal has become cheaper (Afghan government has cut down on export taxes) while international coal prices have also been on a decline. FY23 has not been as bad as one would have predicted for cement, given the abysmal economy, and the soon to come financial statements will reiterate that sentiment.