It will be a while for the tumbledown economy to start recovering, but even as it does, it will chip away some of the profitability of different industries. Construction industry that relies heavily on infrastructure spending led by the government will be at the forefront of this. The results are already tough to swallow—in cement alone, pre-tax earnings dropped 26 percent in 9MFY19; with a recovery in after tax due to tax reversals.
Public sector spending that was a major thrust of the PML-N government has been reduced; there have been cuts to PSDP while restrictions such as ban on non-filers to purchase property have substantially curtailed real estate and private sector activity. Sources say that the construction underway is for projects that were already on the road, and new projects are not picking up, especially in cities like Karachi.
Both cement and steel are witnessing crumbling demand. Production for cement, according to the Pakistan Bureau of Statistics’ Quantum Index for Large Scale Manufacturing (LSM), has come down by 5 percent in the July-Mar19 period. It should be noted that in absence of domestic demand, many companies in the south zone are sending cement and clinker overseas that with the depreciating rupee could be encouraging for earnings. However, manufacturers charge much higher prices locally which ensures that the new sales mix is not the most profitable.
Flat steel productions according to the index have dropped by 25 percent during the 9M period. Flat steel, mostly billets and rebars, or what we call in the local language “sarya” can only grow if construction demand is growing, as construction is the primary demand driver for flat steel. On the other hand, long steel products have witnessed a slight growth of 3 percent likely because these are also used in other industries including automotives and white goods. However, given the subdued demand in the automotive sector, it is a matter of months till long steel producers also cut down production.
One could rejoice that the import bill for steel goods has lowered substantially—for scraps that are used in the production of flat steel—the decline is 12 percent volumetrically and 5 percent in dollar terms. Meanwhile, for other forms of steel products, the decline is 15 percent volumetrically and 11 percent in dollar terms, as per PBS. Inputs like scrap and hot-rolled coils are evidently being imported less due to reduced demand, while overall demand compression may also have narrowed the gap between local and imported steel, at the cost of a fall in market size.
On the other hand, imported steel is also more expensive now which could have led to the fall in imports. The high cost comes from the dual effect of rupee depreciation and the top-up duties including regulatory and anti-dumping measures put in place on the variety of steel products.
Some breather may be had as the government has announced the release of a major chunk of PSDP allocations only yesterday. However, the moratorium on non-filers will continue to thwart vibrancy in the property market driving out not only speculators but also genuine buyers from the space.
The Naya Pakistan Housing Program is expected to be launched as pilot in some cities which may increase the demand in certain areas for construction materials, though any substantive construction at this point is out of question. To successfully launch that program, many screws need further tightening.