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Back in 2016 when the CPEC had just been signed and the economy was visibly booming with government development spending on the rise and business confidence soaring, the cement industry was boasting significant levels of capacity utilization. When it ended that fiscal year at 85 percent utilization, the industry had already decided to enter expansion, projecting upwards of 10-12 percent growth in demand due to macro sentiments. Since many of these expansions were financed in part though long term debt, in a great turn of events, debt servicing is upon them only with a completely different set of economic dynamics.

More specifically, cuts in development spending and overall economic downturn has reduced public and private construction opportunities which have in turn affected building material manufacturers. This reduction is demand has only been exacerbated by rising costs owing to local inflationary pressures, rising global input prices and depreciating rupee.

Profitability for the cement sector as a result has shrunk considerably. An important expense that is increasing due to the expansions the industry undertook are finance costs which have grown due to greater cost of borrowing as SBP tightened monetary policy over the past 20 months.

To combat this, MapleLeaf for example is issuing 85 percent rights shares (at Rs12 per share amounting to Rs6.1 billion) to finance part of its long term debt and improve the debt to equity. On the other hand is a company like Lucky cement that has been preparing for this very day. According to its annual report: “The Company faces no risk of default in payment of any obligation, as it has sufficient capacity of generating cashflows. [It] is currently not utilizing any long term debt”.

Other companies have not followed Mapleleaf’s suit yet, though they still could reduce their debt burden with equity inject. If not they will have to face the storm through better cash flows. But demand is not on their side. This is when banks get requests for debt restructuring as the existing terms may make it difficult for companies to meet their debt obligations if the demand and cost situation does not improve.

Greater finance costs will put that much pressure on profitability which is already in the doldrums. A lot depends on the movement of the monetary policy as well.