What is driving cement sales

Cement despatches are rising, both for domestic consumption and exports, since the resumption of business activities following the decline in the coronavirus infections in June. The sales rose by almost a fifth to 19.3 million tonnes during the first four months of the present financial year to October from a year ago, according to the cement manufacturers’ association data. Domestic consumption grew by 17.9 per cent to 15.7m tonnes as overseas shipments surged by 29.1pc to 3.6m tonnes.

The industry, which had suffered a cumulative loss of Rs13bn — including the Covid-19 related loss of Rs4.7bn — in the last fiscal year owing to the addition of 1.5m tonnes in new capacity and shrinking demand, has seen its profitability return this year as the retention prices increase, excise duty is cut by Rs25 per bag to Rs75 and sales spike. Besides, the reduction in interest rates has significantly lowered the manufacturers’ financial costs that had been a major drag on their margins. There has been a visible improvement in the top and bottom lines of the cement companies even if the firms located in the north of the country are still earning modest margins owing to lower retail prices when compared with the ones in the south — Sindh and Balochistan.

Though the published data on industrial output for the first quarter of the present fiscal year indicates broad-based recovery of 4.8pc in large scale manufacturing after a contraction of over 10pc last year, the uptick in cement despatches is being showcased by the government as a major sign of an economic turnaround in the country following a crushing slowdown during the last two years under the Pakistan Tehreek-i-Insaf government. Analysts argue the sudden surge in the factory output is a result of a pick-up in the economic activities after the removal of the Covid-19 restrictions and pent-up demand from the last quarter of the previous fiscal year.

“Things had started to turn around from the start of 2020,” Mr Mohammad Ali Tabba, chairman of the All Pakistan Cement Manufacturers Association, said in an interview with this correspondent from Karachi. But, he added, a major change came after March during the Covid-19 health crisis when the State Bank of Pakistan (SBP) sharply cut the policy rate from 13.25pc to 7pc and announced several measures to counter the adverse impact of the pandemic on the economy and businesses and protect jobs.

‘The present surge in consumption is driving domestic industry and it will lead to industrialisation without burdening the external sector’

“These measures — subsidised loans for wages, deferment and restructuring of existing corporate debt for one year, long-term, cheap financing for new projects and BMR (balancing, modernisation, replacement) etc — have had a very positive impact on business confidence. If the SBP had not taken these actions, we would have been in a very dire situation today. Similarly, the finance ministry also extended its support to business and released outstanding tax refunds, which also injected liquidity in their operations and improved their cash flows.”

What is driving cement sales? Mr Tabba, who is also chief executive of Lucky Cement, the largest cement manufacturer with production facilities in the Middle East and Africa, believes that resumption of works on the stalled transport and hydro-power projects under the China Pakistan Economic Corridor (CPEC) initiative was definitely one of the major factors driving up domestic cement consumption. Besides, the government has also escalated development spending on its infrastructure schemes.

In the south, according to him, the pent-up demand is a major growth driver as the large, stalled construction projects in Karachi have been revived after an extended period of Covi-19 restriction on the construction industry in Sindh. “Additionally, the construction package announced by the government is having very positive effects on the industry sales, especially in Punjab where, I hear, many large real estate schemes have come up in the last 2-4 months. The despatches for Khyber Pakhtunkhwa too have increased recently because of demand coming from the infrastructure development and housing sector.”

Mr Tabba is confident that the construction package and the measures taken by the central bank to increase the mortgage finance to 5pc of the private sector portfolio of the commercial banks will boost real estate and housing demand going forward, which in turn will further push the demand for cement and allied construction materials like steel and glass.

“So when economic activity increases, the business cycle will improve and demand will grow,” he asserts as he lists some more industrial data to underscore his point on rising local demand. “Besides cement and steel, the sales of cars and fertilizers are also going up. The exports too are picking momentum. The uptick in economic activity and an increase in domestic demand indicate substantial improvement in the business environment. I am optimistic on the future even though some challenges remain,” he adds, listing energy sector debt and decline in agriculture yields as major issues facing the economy.

He is not worried about the recent consumption-driven growth spurt. “There is a fundamental difference between the past growth spurts and the present one: in the past growth was driven by imported consumption, which was bad for the economy as it brought our current account under pressure (and led governments to finance the deficit through foreign savings); the present surge in consumption is driving domestic industry and it will lead to industrialisation without burdening the external sector.”

In Pakistan, the cement consumption of 225-250kg per capita remains one of the lowest in the region. He believes the government could push cement consumption by pursuing policies that encourage industrialisation and boost the housing and construction sector besides increasing its development expenditure on infrastructure. “If policies are good they will generate demand. I think the economy is now headed in the right direction and if the cement demand rises by 1m tonnes we may see new investments in the cement industry sooner than later,” he says.

On domestic cement prices, Mr Tabba points out that the cement rates in Punjab and Khyber Pakhtunkhwa remain around Rs550 per bag, much less than Rs600 two years back, despite the recovery in retention prices post Covid-19. “In Pakistan profit on cement is the lowest in the world. The industry is making the least profit in the world (because of taxes and energy costs). The government collects from the industry a hefty Rs175 per bag of cement in taxes, one of the highest in the world. The taxes include excise duty of Rs75, a tax that is usually imposed to curb consumption of luxury items. Why the government has excise duty on cement is difficult to understand.

Without taxes, our ex-factory price would be Rs300 per bag despite high energy rates, which form 60pc of the total input costs.”

On exports, the All Pakistan Cement Manufacturers Association chief says overseas cement sales depend on international market dynamics. “Pakistan is not a cheap cement producing country. Iran is much more competitive than us because of cheaper gas and electricity. Saudis also have surplus cement capacity. Same is the case with Vietnam. So when you have to compete with oil-producing countries with very low energy costs, Pakistan’s competitiveness is vulnerable. You cannot base your capacity expansion plans on exports. But if you have surplus capacity after selling in the domestic market you can export it.”

Source : Dawn

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