Amid a 15 percent decline in domestic demand, considerably limited utilization of existing capacity, and no major expansion plans on the horizon, the cement industry cumulatively borrowed roughly Rs48 billion in fresh credit on October 24. This follows months of negative net borrowing, a trend that has visibly only waned for a one or two-month period in the past two years.
Why is the cement industry in need of so much liquidity so suddenly? Is this in preparation for the cloak-and-dagger construction package being mulled over by the Prime Minister; perhaps a redo of the colossal failure that was his predecessor’s pet project, Naya Pakistan? Sadly, even if such a project was on the radar of cement companies, the excess capacity they are currently holding is enough to meet a build-up in immediate demand, though any major construction package will not lead to an abrupt surge in demand anyway. Nevertheless, in 5MFY25, capacity utilization for the industry roughly stands at 55 percent. By that measure, to reach 90 percent capacity utilization, the industry will have to grow by over 60 percent during FY25, year on year.
Even if one were to assume that the fresh lending will go toward expansions—which has no solid basis—SBP data on loans by type of finance shows that 96 percent of the net borrowing (for cement) will be used to meet short-term working capital needs, with the remaining 4 percent split between fixed-term borrowing (2%) and foreign bill discounting (2%). So, expansions seem unlikely.
Moreover, the industry is certainly not starving for cash. In the last recorded quarter, 13 listed cement companies generated Rs25 billion in after-tax earnings. The problem is that the share of cement borrowing in October 2024 remained at 3 percent of private sector loans and 5 percent of manufacturing lending—no change from historical shares. This suggests a systematic increase in overall lending, likely driven by banks rushing, nay sprinting to increase their lending in order to lower their advance-to-deposit ratio (ADR) and avoid the punitive tax imposed by the FBR.
It is reasonable to conclude that the sudden surge in lending for cement (see graphs) does not signal a massive boom in the construction sector or a resurgence of Naya Pakistan’s second coming, likely repackaged in N-league speak, though nowhere near as catchy as its predecessor. Consider the industry’s profits for the next quarter padded with “other income”.
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