In the face of numerous challenges, cement manufacturers have managed to stay afloat, largely due to the pricing of their products in the domestic market. Despite a drop in total offtake by 18%, the before-tax earnings for 12 out of the 16 listed cement companies rose by 17% during 9MFY23, year on year.
This resulted in revenue growth of 26%, demonstrating that cement prices have more than compensated for the demand slowdown in the construction industry.
Cement Prices: The Driving Force
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 increased by an average of 42% across markets compared to the same period last year.
The average retention earned for the industry is even higher. In 9MFY23, the revenue per ton sold for the aforementioned cement companies rose 53%, versus a cost per ton sold increase of 51%.
This indicates that whatever cost inflation cement manufacturers have faced due to rising fuel prices has been passed onto consumers and then some. Prices for other construction materials, including steel, marble and tiles, fittings, PVC, and even bricks, have also kept with the general upward trajectory.
The Demand and Supply Dynamics
Even if cement manufacturers were to lower prices to offload more cement, demand in the construction industry would be 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.
The cement industry capacity in 10MFY23 (July to May) is hovering around 57%, and any further reduction in demand may shrink utilization even further, given also that new capacities are coming online. Typically, cement companies tend to compete on prices when utilization drops as they are more eager to sell to the market and not leave large capacities lay idle.
Looking Ahead
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 doesn’t serve anyone to lower prices—it certainly won’t ramp up demand—and anyway, some cement companies may not even be able to afford it given their leverage positions.
Despite its challenges, the cement industry has managed to stay afloat, thanks to strategic pricing in the domestic market. The future, however, remains uncertain as the industry grapples with fluctuating demand and supply dynamics.
Source: Pro Pakistani