Cement prices rise due to improved demand-supply management

Cement prices rise due to improved demand-supply management
Published: 30 January 2007

Pakistan cement prices, after remaining on the lower side during most of the winter season due to lower demand and higher supply conditions, finally regained an upward trend last week. The upward revision of prices is attributed to improved demand-supply management with revival of better coordination between sales and marketing departments of the major producers.

According to sources in the cement industry, during the last few days, cement prices in different locations of the country have increased by Rs 15 per bag to Rs 20 per bag. Although no quota arrangement has been made between producers, prices have started to rebound after meetings between functional heads especially marketing people of various cement companies, as demand has remained very strong.

After falling by 55 percent from its peak level of Rs 400 per bag recorded in April 2006 and by 32 percent from its average of Rs 263 per bag recorded in financial year 2006 to settle at Rs 170 per bag to Rs 180 per bag in December 2006, cement prices have started to rebound as currently they stand in the range of Rs 185 per bag to Rs 195 per bag in various locations, up by Rs 15 per bag to Rs 20 per bag.

“The upsurge in prices during the last few days has been seen mainly due to consensus among the marketing heads of various cement companies who believed that prices were very low and they need them to go up for their survival,” said Atif Malik, an analyst at Jahangir Siddiqui Capital Markets Limited. “Also the demand played a role, which has remained strong at 26 percent for six-months financial year 2007, above our expectations.”

He said the price increase is inline with our expectation since as per our analysis historically commodity prices remained cyclic where prices go down only once after every two to three years.

According to the sources conflicts regarding the quota allocation or quantity restriction, which is the second component of the quota arrangement, however, still remains. And at this point in time, producers continue to operate on 100 percent dispatch policy, though they have agreed not to decrease prices to get higher market share. Moreover, going forward, they plan to further increase prices and make it a weekly feature once peak demand season starts i.e. from middle of February onwards.

Malik said, interestingly, due to this price rise, the market can also expect demand to jack up artificially as cement dealers might indulge themselves in short time hoarding in order to benefit from the price hikes.

He said currently, result season for the period ended December 2006 has started at the Karachi Stock Exchange (KSE). “We expect profitability of the cement sector to decline by 60 percent to 70 percent in second quarter of financial year 2007 versus second quarter of previous financial year and even more than the 31 percent observed in first quarter of current financial year since prices remained depressed throughout the quarter.,” he added. In second quarter of current financial year, market might see most of the cement companies going in the red. Nevertheless, with the recent rebound in prices and more hikes to follow suit, third and forth quarter for the cement industry expected to be better than the first two quarters.

Mr Malik said for the full financial year 2007, listed cement sector is expected to post a decline in earnings in the range of 40 percent to 50 percent. The sector posted superb profitability growth in last four year, financial 2003 to financial year 2006, with a CAGR of 97 percent. However, beyond financial year 2007, however, cement sector profits are expected to grow positively albeit at a lower pace.