Construction slowdown hits cement sector

KARACHI: The continuing slowdown in the construction sector has hit the cement manufacturing sector hard, with the two biggest players – Lucky Cement and DG Khan Cement – both reporting lower earnings for the third quarter of the fiscal year ending June 30, 2010. Lucky Cement, the only Pakistani cement manufacturer to be listed on the London Stock Exchange, reported a net income of Rs653 million ($7.7 million) for the first quarter of the calendar year, 42% lower than the same period in the previous year.

The earnings were much lower than expected. “The market had been expected a slump in local sales,” said Farah Marwat, analyst at KASB Securities. “But we were not expecting the slowdown in exports, which was the real cause of the decline in earnings.” According to Ms Marwat, the firm’s profit margins on export sales are much higher than those on local sales. Hence the slowdown in exports caused a sharper drop in earnings than was expected.

“Total volumes [of cement produced] were actually up 2%,” said Ms Marwat. But the market had been expecting earnings of around Rs2.5 per share as opposed to the Rs2.02 that Lucky Cement ended up declaring. Lucky Cement constitutes roughly one-third of total cement exports from Pakistan, with its plant’s location in Karachi being one of the major factors in its success compared to its rivals.

However, Lucky Cement also has a manufacturing facility in District Lakki Marwat in Khyber Pakhtoonkhwa, which was set up to cater to the domestic market as well as exports to Afghanistan. DG Khan Cement is one of Lucky Cement’s rivals for the domestic market and also announced its earnings on Thursday, with a net loss of Rs81.8 million and loss per share of Rs0.27.

The losses come despite the fact that the company has been able to benefit from an inland freight subsidy that reduces the cost of exporting. JS Global Capital estimates that the subsidy reduces the transport costs on its products by as much as Rs123 per ton, 35% of the total Rs350 per ton total cost. The cement sector in Pakistan has been negatively affected by the collapse of the real estate bubble in the Persian Gulf, particularly Saudi Arabia and the United Arab Emirates, to which the bulk of the country’s exports had been heading.

Coupled with the decline in domestic demand, the fall in export volumes has dealt the industry a blow from which it has yet to recover. DG Khan Cement’s stock closed at Rs29.27 on Thursday, down 4.56% in trading on the Karachi Stock Exchange. Lucky Cement closed at Rs 77.85, down 3.32% for the day.