Cement stocks have outperformed in PSX lately

An analyst at Intermarket Securities Ltd has reported that cement stocks listed on the Pakistan Stock Exchange (PSX) have recently outperformed and the present bull-run in cement stocks – up 82 per cent since March 2020 – has been driven by many factors. That includes good pick-up in local demand led by the private sector, anticipated commencement of Naya Pakistan Housing Scheme and the recent announcement of Karachi Package by the government, and lower input costs amid a decline in international coal and oil prices.

In addition to recovery of the north’s cement prices, where the improvement in retention prices was also driven by fewer trade discounts and decrease in federal excise duty by PKR25/bag (US$0.15/bag).

The analyst highlighted that most of the above positives would continue in the medium term. However, they have not yet lifted the profitability of cement producers, as reflected in financial result for 4QFY20.

North and south price and dispatches issues
As per APCMA, local cement dispatches in 2MFY21 grew by 18 per cent YoY to 6.6Mt. The increase was witnessed only in the north, where dispatches rose 23 per cent YoY to 5.9Mt, whereas southern demand ostensibly declined by one per cent YoY to 0.8Mt  (12 per cent of total sales).

August 2020 was the 18th consecutive month in which the south did not get its due share in total demand (24 per cent) in line with its installed capacity.  Exports from the south comprised 12 per cent of total sales compared to nine per cent in FY19.

The research house sees the above trend as the result of alleged northern producers selling in southern Pakistan. This practice started in 4QFY19, when northern producers began commissioning new capacity. The reason behind this strategy is the wide price disparity between the two regions (nearly PKR150/bag). This way, northern producers raise their utilisation levels (to cover fixed costs) amid inadequate local demand and dried-up exports. Prices in the north are presently hovering in the range of PKR500-515/bag, up from a low of PKR470/bag in April 2020. The increase is not substantial, because highly-leveraged producers will remain in losses at such price levels, according to the research house. Hence, many northern cement producers have resorted to increasing volumes by selling in the south of the country.

Southern prices have recently declined to PKR665/bag from PKR696/bag in May 2020, according to government data, while prices have been rising in the north. Northern producers are selling at as low as PKR570/bag in the south, whereas, southern-based plants are selling in the range of PKR610-650/bag. Southern producers are resorting to more significant exports but at compromised margins.