Cement: Is industry in crisis?

Demand slowdown, low price retention, high cost inflation. The cement industry is putting out fires in several departments but has not been entirely successful given the circumstances. Profitability has plummeted for all cement firms (against an already low base), most if not all sliding into losses, barely turning a profit in the first half of this ongoing fiscal year. Cumulatively, the industry has incurred a loss in 1HFY20 (for the 14 companies evaluated for this analysis). All signs are blaring red.

Let’s look at demand. For one, the industry has expanded capacity considerably—adding about 10 million tons in only the past several months. This has in turn raised the urgency for firms to sell off more cement, in a market that has simmered down. Domestic demand has been increasingly lethargic (due to lower government and private sector spending on development and construction), particularly in the south zone where demand typically always remains behind northern markets. The industry registered a 6 percent growth in sales during 1HFY20 (domestic: 3%, exports: 23%) evidently, brought forth by exports.

Exports have also taken a different turn. Cement companies located near the port have been exporting more clinker, than cement to markets overseas. Clinker was 46 percent of all exports going out of cement factories overseas and cross-border in 1HFY20. The classic example is Attock Cement which is the only company other than Lucky that has registered a substantial profit margin in 1HFY20. The company’s clinker exports rose 51 percent during the period while cement exports grew 23 percent. A whopping 60 percent of its sales are now coming from exports. Good for Attock, though other smaller cement companies located near the port have not been as aggressive in reaching markets overseas. Meanwhile, firms located farther away from the port have also been at a clear disadvantage.

Exports share in total dispatches for many cement companies in the north has fallen as markets like India have become entirely inaccessible due to the recently imposed countervailing duty on Pakistani goods. Zero exports to India meant that the 46 percent growth in exports to Afghanistan only just made up for the loss in that market next door.

Demand has been a mixed bag, and though exports have come to the rescue (they were 18% of total dispatches in 1HFY20, against 15% the corresponding period last year), it is clear that the industry depends heavily on domestic markets where it is able to earn better margins and keep tighter controls on overheads. However, what really put a dampener on the combined toplines of cement firms were the retention prices they fetched both domestically and abroad. Except for 2 companies, revenue per ton for the entire industry is down, and by a considerable difference. More on that in a later analysis.