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BR Research

Cement’s brave face on!

Whether it is cement’s substantially reduced domestic demand, falling retention prices or cost inflation—cement manu
Published May 7, 2020

Whether it is cement’s substantially reduced domestic demand, falling retention prices or cost inflation—cement manufacturers not unlike other businesses have had a rude awakening. This jolt however came long before COVID-19 pandemic hit the world. Looking at their current financials, it makes sense why companies would leap to re-establish a cartel-like arrangement (read more: “Of cartels, competition and consumers”, April 26, 2020) and raise prices when expectations of demand goes up and prices could be raised to the level they were at last year. The three major factors have led to a cumulative decline in profits of Rs31 billion in 9MFY19 into losses of nearly Rs5 billion.

Net profits across the cement industry were already signaling red in the six month period. In fact, several smaller companies were in gross losses as cost pressures rose and demand was not keeping up. As economy was shrinking, many construction and infrastructure projects were stalling and demand was not growing as expected particularly in the southern zone of the country. Meanwhile, demand had started to improve in the north side, though prices remained in flux because companies had expanded capacity much greater than the growth in demand that was being seen. In the third quarter, retention prices fell about 30-35 percent as companies hustled to keep volumes going.

Even though total sales during the period rose 7 percent (of which exports grew 26 percent and occupied a share 17% share in total in 9MFY20 against 15% last year), cumulative revenues evidently fell due to the price dynamic. Another perhaps important point is the higher share of clinker in total export (about 47% of all cement exports) composition where clinker typically fetches a lower price compared to cement. Despite Indian market closing doors to Pakistani cement, companies have been able to find market spaces left open by other suppliers. Many typical exporters to smaller countries have moved to bigger markets such as China to meet its demand leaving space for Pakistan to step in.

The uncertainty of coronavirus is very real and demand will continue to display signs of unpredictability. Unless lockdowns open, countries will not be spending (and importing) too much construction materials and will likely focus expenditures on health and safety nets rather than infrastructure. Meanwhile, closing borders with regional markets such as Afghanistan also does not bode well.

Though the construction package announced by the PM has raised hopes that many stalled projects will be breathed new life into, how soon will that happen given current smart lockdowns and how fast construction will re-begin will largely dictate demand as well as price dynamics moving forward. Needless to say, the full-year financials will not be too far from the current situation.

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