Cement companies post a rise in pre-tax profit but face challenges

In 9MFY22-23, 12 out of the 16 cement manufacturers at the Pakistan Stock Exchange (PSX) reported impressive before-tax earnings. Despite a drop of 18 per cent in total offtake (sales volumes), revenue growth was 26 per cent higher YoY. The local media research team suggests that cement prices have more than compensated for the demand slowdown in the construction industry, leading to strong returns for cement companies. 

With only a few weeks until the fiscal year ends, if the current trajectory is maintained, cement prices, as captured by the weekly price movements of the Pakistan Bureau of Statistics SPI division, will have (on average) increased by upwards of 42 per cent across markets compared to the average prices during the same period last year. The average retention earned for the industry is even higher. In 9MFY22-23 the revenue per tonne sold for aforementioned cement companies rose 53 per cent versus a cost per tonne sold increase of 51 per cent in the same period last year. Whatever cost inflation cement manufacturers have faced due to rising fuel prices has been passed onto consumers. 

Price of construction materials
Prices for other construction materials, including steel, marble and tiles, fittings, PVC and even bricks, have also kept with the general upward trajectory. Even if cement manufacturers were to lower prices to offload more cement, demand in the construction industry is limited, and other construction materials have not become cheaper. Only a few months ago, builders raised a lot of hue and cry, announcing a ban on steel procurement in protest of massive price hikes in rebars. 

Cement capacity utilisation
The cement industry capacity utilisation rate in 10MFY22-23 (July 2022 to May 2023) is hovering around 57 per cent, and any further reduction in demand may shrink utilisation even further, given also that new capacities are coming online. Typically, cement companies compete on prices when utilisation drops as they are more eager to sell to the market and not leave large capacities idle. But demand is not expected to waver too much as development spending will remain suppressed and consumers’ buying power is drying up. At such a time, cement manufacturers will try to sell off as much cement as they can in the domestic market, where they enjoy significant pricing power and then offload the rest onto exporting markets if they are good for margins. Needless to say, it does not serve anyone to lower prices, it certainly will not ramp up demand and some cement companies may not even be able to afford it given their leverage positions.