Cement sector endures tough year

Decline in prices, Covid-19 outbreak hit earnings of cement companies

The listed cement sector of Pakistan went through its second difficult year in a row with negative growth as it reported a loss of Rs13 billion in financial year 2019-20.

“The country’s listed cement sector posted a loss of Rs4.7 billion in the fourth quarter alone,” said Topline Securities’ Deputy Head of Research Shankar Talreja in a research report. “However, the loss during the final quarter contracted 20% compared to the third quarter of same year.”

According to him, the depressing bottom line in FY20 was largely due to a decline in retention prices of cement coupled with a slowdown in economic activity in the final quarter due to the Covid-19 outbreak.

Fiscal year 2020 turned out to be an unusual year for the cement sector in terms of sales because domestic cement demand declined 1% year-on-year to 40 million tons.

Talreja added that overall volumetric sales of the sector grew 2% year-on-year to 47 million tons in FY20 whereas domestic sales remained largely unchanged. Exports, on the other hand, increased 20%, he said.

Domestic retention prices of cement fell in the range of 18-22% year-on-year due to competition among players over acquiring greater market share, increase in federal excise duty (FED) to Rs2 per kg (from Rs1.5 per kg) and increase in dealer margins, he said.

The analyst pointed out that cement companies were not able to pass the full impact of the rise in federal excise duty on to customers.

The research sample included 15 out of the 16 listed cement companies having around 100% of the sector’s market capitalisation.

The effective capacity of the cement industry in FY20 averaged 64 million tons (total 69 million tons) versus 56 million tons in FY19 with utilisation ratio of 74% (domestic 63%) in FY20 compared to 84% (domestic 72%) in FY19, said Talreja.

Clinker exports totalled 4.2 million tons, which dominated the sector’s total export figure of FY20 by contributing around 52%, he said.

Exports to Afghanistan grew 10% year-on-year despite frequent border closures. Cement exports to India remained zero in FY20 after imposition of 200% duty by the neighbour on the pretext of Pulwama attack, he pointed out.

Gross margins came in at 5% in FY20 against 22% in FY19, he said, adding that gross margins during the fourth quarter of FY20 stood at a meagre 1% against 16% in the same quarter of FY19.

Coal prices in FY20 averaged $70 per ton - with a two-month lag - compared to $94 per ton in FY19.

However, the prices in rupee terms averaged Rs158 in FY20 compared to Rs136 in FY19, which resulted in overall pressure on expenses, he said. Finance cost of the sector surged 96% year-on-year to Rs18 billion on the back of increase in borrowing along with high interest rates in FY20.

“Last year, domestic cement demand declined 2%,” said Sherman Securities’ analyst Saqib Hussain. “In the last 30 years (FY 1990-2020), we never saw local cement demand declining for two consecutive years.”

He was of the view had coronavirus not hit the country, cement demand would have grown.

Net sales of the sector declined 17% year-on-year to Rs242 billion in FY20 with fourth quarter sales declining 30% year-on-year and 18% quarter-on-quarter.

“Excess cement supply also hurts cement companies’ retention prices,” said Hussain.

“During the year, around eight million tons of additional cement capacity became functional in the northern region,” he said. “Resultantly, cement utilisation in the region declined to 74% in FY20 compared to 84% in FY19.”

Published in The Express Tribune, October 7^th, 2020.

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