KARACHI: The cement industry of Pakistan saw yet another good year mainly due to an increase in demand and low international prices of coal and oil.
The growth in profitability of cement companies in 2014 can also be gauged from the fact that the sector once again outperformed the Karachi Stock Exchange (KSE)-100 index by a wide margin. The cement sector posted an exceptional return of 61% – more than double the return by KSE-100.
“Earnings of the cement sector improved mainly due to lower coal and oil prices, and increase in construction activity,” said Topline Securities in its recent report. This was not the first year this sector outperformed KSE-100 and remained in the top performing sectors — it reported an exceptional gain of around 75% in calendar year 2013 when the stock index posted a return of about 50%.
Besides, the improvement in overall economic growth that leads to more cement consumption and the 10-12% increase in cement prices also heavily supported the overall profitability of cement entities.
On the other hand, the main international factor that once again helped cement sector was low coal prices. As expected, slow economic recovery in India and China – the world’s two biggest coal importers – continued to affect the international coal prices throughout 2014.
Since imported coal constitutes 50-60% of the total cost of production of Pakistani cement companies, its historical low prices helped most of the cement makers.
The recent sharp decline in oil prices also hit international coal prices that declined to their five-year low of $62 per ton, down 57% compared to the high of $145 per ton in June 2010. In fiscal year 2014, overall cement sales (local and exports) jumped 2.51% as they hit 34.27 million tons compared to 33.43 million in fiscal year 2013.
“The cement sector has posted growth at all fronts during 2014,” AKD Securities analyst Jawad Shamim told The Express Tribune.
The only downside during 2014 was decline in exports. The withdrawal of Nato troops during the year has significantly hit construction activities in Afghanistan, which also hit sales of Pakistani cement, he added. Similar to 2013, the increase in cement prices once again played an important role in increasing the profitability of cement companies in 2014.
From Rs400 per 50kg bag in March 2011, cement prices crossed the psychological mark of Rs500 last year in 2013. With a little bit of change, prices remained in the range of Rs505-535 per 50kg bag during calendar year 2014.
“Cement companies reduced prices in recent months but it had more to do with the slow winter demand than to pass on benefits of the low cost of production,” added Shamim.
Analysts also point out that, though the government fell short in releasing funds for the Public Sector Development Programme, better construction activities during 2014 helped support the increase in cement consumption.
With strong fundamentals, analysts are predicting another year of handsome growth. With the gradual decrease in cost of production, many cement companies have retired their debt that is also going to help their profitability in 2015.
Published in The Express Tribune, January 1st, 2015.
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