Cement: Excess capacity looms

Although the cement sector’s recovery story will not end in any record highs, the rebound is welcome for the industry that was facing pressures from mounting idle capacity and crumbling exports. In 10MFY26, growth in dispatches of 10 percent is driven by a strong domestic rebound. Dispatches rose 12 percent year on year, even as exports fell in the sales mix.

For the past three years, domestic demand remained dull as the macroeconomy trudged unhappily along troubling times. What prevented companies from slipping into losses were exports shouldering a greater share of the burden, climbing from just under 10 percent to 20 percent in a matter of a few years. They also held strong control over prices which enabled them to raise the price tag whenever costs rose. This is where tacit collusion always works in the favor of the cement industry.

In FY23 for instance, when total offtake dropped by 16 percent year on year, the industry cumulatively made 9 percent higher pre-tax earnings and kept margins constant.

The present shift back to the local market is significant because producers enjoy better pricing in the domestic market. But as exports take a slow backseat, this also places the burden of sustaining offtake squarely on domestic consumption. Which in Pakistan’s experience is fairly precarious.

Domestic demand is being driven by a short recovery in the broad macroeconomic environment, easing inflation and a reboot of infrastructure and development projects stopped-short by a lack of funding. A new housing scheme that can dole out loans of up to Rs1 crore for 20 years will also begin to bear fruit in the form of rising construction demand.

However, the ongoing oil crisis due to tensions in the middle east have already started to bleed into inflation which will drain pockets faster, raise costs of production for firmsas rising policy rates slow down aggregate demand.

Current average domestic demand for cementis certainly up, but still sits 13 percent below peak levels witnessed during the high-growth cycle of FY21. Nearly 40 percent of capacity remains idle. Cost pressures too threaten to complicate the recovery as cement production heavily relies on imported coal and fuel which are exposed to global price swings. Cement players maintain the ability to pass on the rising costs to consumers but that ability may not be as limitless as it may seem. Demand is more likely to face fatigue in coming months.