Skip to content

Construction in uncertainty

Last week, PM Imran Khan inaugurated Rs100billion worth of projects for the construction of 20,000 housing units under the Naya Pakistan Housing Plan (NPHP). This is exactly the good news that cement, steel and other building material manufacturers needed. But a lot has changed in the past week.

With the corona scare, oil prices plummeting and subsequently the ultimate stock market meltdown, the country, not unlike the rest of the world is a shaking leaf. Coronavirus will certainly hurt industrial production—whether it is because industries are shut down to protect the spread of the virus or the virus is spread and the economy is in chaos. The uncertainty is definitely setting in.

What is the outlook on construction? On the one hand, low oil prices will benefit energy-intensive cement and steel industries, not hurt them. Financing cost after 75bps cut in interest rate for highly leveraged companies may come down a little. This together with global coal prices dropping will curb costs on the books. However, other more substantial factors are not calming nerves.

The cement industry saw profitability sharply recede into losses during the first half of 2020. Demand in the domestic markets was lethargic as the public and private development expenditure remained weak, while exports to India had been shut down. Companies were selling more clinker than cement which fetched lower prices in the international markets.

The outlook so far was that while cement companies will continue to suffer through the rest of the year financially, given the losses in the first half, recovery in demand, particularly in the north zone (in 8MFY20, dispatches grew 15 percent) would help while NPHP projects launching would further bolster volumes. The total growth expectation was about 3-6 percent annually from last year’s dispatches of 47 million.

But nobody took into account the sudden outbreak of corona. Now borders are being closed. The one with Afghanistan is being closed for two weeks which will immediately drop exports sent through land. Pakistan exported 1.7 million tons of cement to Afghanistan in 8MFY20 –about 200,000 tons in February. If trade halts altogether over the next few months, Pakistani cement industry could lose an estimated 0.8 million tons of export dispatches by the end of June (taking a simple average of the past eight months and extrapolating to the next four). That’s precious volumes, considering Pakistan has already lost a chunk of market (about 800,000 tons were exported in 8MFY19) when Indian countervailing duties hit the industry. The loss in exports will depend on how long the border shutdown will last.

Couple this with the uncertainty in the markets, retention prices will be in flux. Companies will be racing to the markets to offload excess cement and may not find buyers. Of course, this part is guesswork. If construction projects continue on the timelines they have been planned, domestic markets may not get affected too much on the demand front. Though it seems likely that the global pandemic will make things far worse before they can slowly get better.

 

Source: Brecorder

Leave a Reply