Cement margins are back in the game in the first quarter of the financial year. Companies that have performed well—such as Kohat, Fauji, Bestway have gross margins trailing 30 percent. This is despite the industry facing some of the highest coal prices in history and comparatively strong demand in cement dispatches last year. Adequate and timely increase of cement prices in the markets, and prudent inventory management of coal not only cushioned the prospective blow to the bottom-line but actually shored earnings considerably across the board.

Of the three under review in this piece (Fauji, Lucky and Bestway), Lucky’s performance by comparison has been lacklustre, even compared to a smaller company like Fauji that demonstrated a robust top-line growth and the highest earnings growth compared to the other two. Having said that, Lucky continues to take the lead in the industry even though, evidently other companies have been performing better. One reason for subdued performance is the loss in demand for clinker overseas which had a sizeable share in Lucky’s exports. In fact, industry’s clinker sales have dropped 54 percent in 1QFY22 year-on-year.

Of the three, Lucky is the only player that operates in the south and the north zone. Price data from the Pakistan Bureau of Statistics (PBS) shows prices in the north have increased by much more than those in the south markets and in fact, the gap between north and south prices has slowly but surely been inching close. Based on dispatch data of respective companies, revenue per ton sold for Lucky grew 27 percent versus Bestway’s 37 percent and Fauji’s 30 percent.

Costs have certainly increased due to higher fuel and coal prices, as well as rupee depreciation that has made imports more expensive. Coal has been having the toughest rally of its life (read: “Coal chills!”, Oct 18, 2021) with South African coal increasing by over 200 percent in value in the past 6 months alone. But the alarm bells had rung early on and cement companies managed to shift their coal procurement to local sources as well as Afghan coal. While both alternative sources come with their own set of problems, relating to being lower quality and cement companies having to recalibrate plants to use the new coal, the shift has certainly shielded cement companies from margins falling to the ground. Energy efficiency measures such as waste heat recovery have continued to help cement manufacturers from putting all their eggs on the national grid basket.

Finance costs for all three companies are negligible as a share of revenue due to minimum debt and have dropped due to lower interest rates compared to last year.

As all three companies enter expansion—with Fauji Cement about to become a top player in the north—all eyes will be on domestic demand and how it matches with projections. In 1Q, demand has been slow to pick-up and if it continues to be dreary, cement companies will have to contend with that. The first set of expansions though will come online in 2023 which is still far away, by which time exports that have slid considerably will likely also revive. Something to fall back on. In 2Q, even better retention prices, expected growth in domestic demand and coal inventories warehoused will keep earnings positively beaming.