Rising commodity prices in international markets especially coal have raised concerns for the local cement sector, which now struggles to raise prices amid pressure on the sector's margins, stated a report on Thursday.
“Increase in prices of energy commodities have grappled the whole world and are inflicting serious damage to margins of local producers particularly when authorities have raised concerns over increase in cement prices,” said AKD Trade in its report released on Thursday.
Local cement dispatches declined by 12.17% in September 2021 with the total recorded at 4.589 million tons against 5.225 million tons during the same month last year.
On the other hand, exports suffered a massive decline of 49.45% as the volumes reduced from 1.131 million tons in September 2020 to 0.572 million tons in September 2021.
Cement despatches drop by 12.17pc in Sept
Pressure on the cement sector comes as Richards Bay coal prices currently hover at an all-time high of $219.6/ton. The FYTD average now stands at $139.3/ton while an effective average of coal prices for FY21 stood at $70.35/ton, said the report.
“To pass-on this increase in cost, local manufacturers need to increase prices by Rs120-30/bag, however, so far, prices have only been increased by Rs60-70/bag which will result in pressure on margins in 2QFY22,” said the report.
The report expressed optimism that recent developments coming from Russia that has hinted at increasing gas supply to Europe, which, in case it happens, can result in significant ease off in coal prices.
“Even though demand for 1QFY22 remained lower than our estimates, we expect demand to pick up as overall macro environment settles down and clarity emerges on commodity prices and exchange rate,” it said.
The report, however, expressed concern over the ability of local players to pass on the price-increase. “In case local players fail to pass on the increase in cost, we do not rule out the possibility of highly leveraged players reporting losses for 3QFY22.”
The report pointed that the cement sector is expected to remain under pressure, but it is a "good opportunity to accumulate in our opinion where once coal prices ease off, with the other fundamentals intact, the sector will be poised for significant returns”.