Pakistan cement industry's eyes on FY19-20 budget

Pakistan's federal budget for FY19-20 is scheduled to be announced today. Advisor to Prime Minister for Finance, Revenue & Economic Affairs, Dr Abdul Hafeez Shaikh will present it in Parliament followed by debate/approval by legislators in due course of time. Experts believe it would be negative for cement industry, if no incentives are simultaneously announced.

AHCML Research House expects budget FY20 to have a negative impact on the country's stock market, especially the cement, steel, fertiliser and chemical sectors. Increases in federal excise duty (FED) and turnover tax, combined with no reduction in corporate tax and a levy of FED on gas supplies as well as a cut in Public Sector Development Program (PSDP) and the General Sales Tax (GST) at 18 per cent versus 17 per cent, are all expected to have a detrimental effect on the sector. 

If all these measures are taken, it will increase cost of doing business. FED on cement is currently levied at PKR1.50/kg (US$0.009) implying PKR75/bag (US$0.49). It is proposed to raise the same in budget FY20 to ~PKR1.75-2.0/kg implying PKR87.50-100/bag, thereby yielding incremental revenue of ~PKR10bn/annum.

Experts think that if it is levied, the industry which is expecting surplus capacities coming online and 'price wars continuing, especially in north' in the scenario of a 'weak cement cartel', analysts foresee cement manufacturers being unable to pass-on the impact of any hike in FED, thus leading to an erosion in cement manufacturers’ bottom-lines by 15-20 per cent as a result of this revenue measures.

A cut in PSDP in FY19 exacerbated the decline in domestic demand set in motion by the country's economic slowdown. Hence, a stagnant allocation of PSDP in FY20 would bring no support to the already dull dispatches growth.

Similarly, cement prices will have to be increased by PKR5/bag on average to completely pass on the impact, if GST is increased.