Hold your breath

Cement kilns in the country are cooling down, and yet, industry-wide cement sales to domestic and foreign markets show an impressive double-digit growth of 58 percent during July, year on year. But compared to just the previous month, dispatches have dropped 21 percent. Unfortunately, the growth is not in any way indicative of a major demand recovery since dispatches were uncharacteristically low during July of last year, dropping to 2 million tons for the first time since 2010. Cement dispatches were below that level in 2007 when Pakistan was in the throes of a debilitation financial and economic crisis. FY23 began like that. This July’s 3.2 million tons of cement sold to markets by the industry is only mildly hot, or shall we say, cold. In truth, demand dampeners are still up; construction costs are still high, buying power suppressed, interest rates mounting and cement industry is not where it used to be in terms of volumes, or capacity utilization.

What perhaps should be more troublingis the trend of average monthly dispatches sold by the industry since FY17. Amid rising capacities, average monthly dispatches to the domestic market have shrunk since FY21, now third year running. Evidently, at about 2.8 million tons, the industry sold lower dispatches in the first month of this fiscal year (FY24) than the average monthly dispatches sold over the past seven years in the domestic market. Meanwhile, the industry has been selling more shipments abroad due to better cost circumstances because of more affordable coal from nearly all sourcesbut in volumetric terms, exports in July were lower than last month (down 24%), though they remained at 14 percent of total offtake.

The industry has been investing cash back into the business by expanding capacities and spending on energy effeciency projects. The former was hoped to serve a burgeoning demand forecast as new policymakers at the helm announced ambitious plans to build a massive number of new homes and expand the construction industry through the construction amnesty package and a mortgage mark-up scheme for first-time home buyers. In anticipation of such, the cement industry was ripe for expansion. Alas, that dream was swallowed whole by a severe lack of foresight and poor policy planningof those that held the regins of power, and only in part due to political mayhem.

Nearly three years on, the industry has expanded capacity, nobody knows what happened to the mortgages since the SBP stopped updating on it, and the FBR has also fairly remained silent on the tax amnesty it offered to an inordinate number of builders and developers and the projects they proposed without revealing much else detailfor anyone to poke holes in.

This leaves the industry with ample capacity to offload. Thus far, cement manufacturers have been coasting on strong pricing power in the domestic market, ability to procure coal from Afghanistan when international coal prices rose sky-high, affordable financing for their expansion projects under TERF and relying on their captive power to lower energy costs. The next few months will determine how far this bout of good luck will last.