Profits of most cement companies are expected to remain intact in the current financial year. DESIGN: JAHANZAIB HAQUE
The cement industry of Pakistan has seen heady days over the last three years, becoming one of the best performing sectors on the Karachi Stock Exchange (KSE) – the country’s biggest bourse that gave handsome returns of 52% in the last financial year.
The industry put in strong performance after both internal and external factors turned positive, leading to an increase in margins of most of the cement companies running in the country.
Among global factors, a continuous decline in prices of imported coal – the main ingredient and a source of fuel in cement manufacturing constituting 50-60% of the production cost – has given a boost to cement companies and slashed cost for all players – small and big, most efficient and least efficient.
International coal prices have plunged to $75 per ton from $145 per ton in June 2010, down 48%. In the first 10 months of the current calendar year alone, coal prices have come down a significant 18% to $75 per ton because of weak global demand.
The demand fell in the wake of economic slowdown in emerging economies, especially China and India, both of which are huge coal importers, which dented world appetite for coal. Now importers, especially emerging economies, are purchasing coal on their terms, keeping prices low compared to 2010 and 2011 when better demand kept prices at higher levels.
Since almost all cement companies in Pakistan import coal to meet energy needs, their cost of production has gone down considerably. Moreover, lower coal prices also pushed higher earnings of these companies across the board in fiscal year 2012-13.
Mid-tier cement companies made the most of the price crash since they were relatively less energy-efficient, JS Global, a research and brokerage house, said in a recent report.
These companies announced strongest earnings in 2012-13. Maple Leaf, Pioneer Cement and Fecto Cement, which are at the bottom among energy-efficient companies, reported extraordinary year-on-year earnings growth of 550%, 155% and 68% respectively.
Rise in cement prices
Apart from the favourable international scenario, the industry also got some support from the domestic market. This led to a gradual decline in the cost of production and it came at a time when the industry was regaining its lost ground in terms of prices.
Cement prices, which had touched a high of Rs400 per 50kg bag in September 2008, dropped to as low as Rs250 per bag in September 2009. Later in March 2011, prices reached the psychological mark of Rs400 per bag following a gap of two and a half years, which saw cement manufacturers lock in a price war that hit their profits.
Today, cement companies are selling their products in the range of Rs470 to Rs500 per bag, up 79% in three years compared to Rs280 to Rs300 in June 2010 – one of the primary reasons for the gradual but sharp rise in cement industry’s profits in the period.
Performance on KSE
Cement was the second best performing sector on the Karachi Stock Exchange with astoundingly high returns of 74% in financial year 2012-13, just behind textiles, which gave 81% returns.
This performance is way better than the 52% average returns given by the benchmark KSE 100-share index during the year.
Among leading cement stocks that gave handsome returns were Lucky Cement – the largest and one of the most efficient cement manufacturers in Pakistan with over 18% market share – which grew 80.87% in 2012-13. Similarly, the stock price of DG Khan Cement, another leading company, recorded a sharp increase of 111%.
Lucky Cement Chief Executive Muhammad Ali Tabba, while talking to The Express Tribune recently, said profits of most of the cement companies were expected to remain intact in the current financial year because of strong fundamentals on which the industry stood today. He expected the industry to repeat the growth story this year as well as it did a year earlier.
Published in The Express Tribune, October 28th, 2013.
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Also one thing that when coal was at 146$ in 2007 and 2008 all these companies incurred huge losses even some of the Companies have not yet recovered all those losses, then how can they afford to pass on relief of decreased coal prices to end consumers, despite all this supporting for cements I dont think margin of 44% is justifiable on any ground it should be arround 22%-25% at most
@YousafHaque.... Dear without justifying and advocating cartelization, do you know the US$/PKR parity rate in 1990 when cement bag was of Rs. 80???
It was 22 and now it is at 106 and that is arround 5.0x.
Coal prices was not always at 146$..... untill year 2007 it remained arround 50$ when it shoot up to 146$ then came down so how can you say that production costs has been decreasing all the time.
Then again u said no new factory in last three decades, do you think current economic condition after 2001 and energy situation deserve such a huge investment even then almost all the manufacturers has doubled their installed capacity during the period.
Might be I am very wrong but all the information is available on net and APCMA website. Do criticize but support your crticism.....
In the light of very informative comments above,I can say with surety that end-consumers are being fleeced very heavily by the producers of various items of daily use,by forming cartels.Only cement,for example,was available at Rs.225/-per bag some four years back.According to my knowledge no new mills has been installed for over three decades,prior to which building and machine cost was very low as compared to today's cost of construction and machinery
i work as dealer of cement,this cartel system has crashed us,their formula to control the price is the decrease the production capacity up to 50%, mostly large units like lucky and bestway is running up to 50 to 60%....., business cost has gown to high for lower middle class because of these industrialists...after budget they increase price of 45 to 50 rps in a day, and reduce the production to 45% to control price hike.tax increase is 7 rps per bag.
The cement manufacturers have a collusive pricing arrangement in place, through which they control the per bag price of cement in Pakistan. They have set production quotas, to keep the production low artificially to keep prices at a level where all manufacturers can post profits.
Coal prices have gone down internationally I agree. However, landed cost of coal in Pakistan, has not followed the trend because PKR has depreciated against the USD, hence maintaining the margins of the manufacturers.
@author:::Since you have made extensive research on the price mechanism of cement factories,will you please care to tell what are the "strong fundamentals on which the industry stands today".Secondly what is the cost-per-bag of cement,after the price of coal worldwide has declined to half its previous price.Thirdly why since the de-nationalization of cement factories,in early '90s,when a bag was easily available for Rs.80/-in open market,the price of cement has kept on increasing,though the cost of production has gone down due to the decrease in the cost of coal