The cement sector showed robust growth in the first quarter of the current fiscal year with 93.1 percent capacity utilisation while analysts are optimistic that the growth momentum will continue for the next two years as cement demand is rising in the country. Analysts said almost all existing cement companies are going to expand their plants, in which most of them have started excess production to meet local and foreign demand. “There is an increase of 58 percent in overall profitability of the cement sector primarily due to 26 percent growth in cement demand,” said Abdul Rasheed, an analyst at Investcap Securities, a local brokerage house.
Analysts said capacity utilization of the cement companies remained at 93.1 percent in July-September period, up from 74.3 percent during the same period last year. There are 21 listed cement companies, but only 16 companies have announced their financial results for the first quarter, while Pakland and Zeal Pak have not yet announced their results. Saadi is under trial production and hence the company has not issued its financial statement while Mustehkam and Chakwal are not operational.
Cement sales in October have increased 23.48 percent on year to 1.339Mt, said Sarwat Fatima, an analyst at Elixir Securities. She said cement export remained 569,000 tons during July to October period and added export remained slightly lower in October compared to September.
Analysts said cement firms, which have announced financial results, have earned a cumulative net profit of Rs 1.7 billion in the first quarter against Rs 1 billion in the same quarter last year. D G Khan Cement earned highest profit of Rs 282 million followed by Lucky and Bestway with profits of Rs 253 million and Rs 226 million, respectively.
Analysts said even though cement sector’s average manufacturing cost increased by 3 percent, to Rs 1,940 per ton, due to rise in furnace oil and coal prices, the sector managed to improve its gross margins by 420 basis points, to 32.9 percent. It was due to better retention prices for exports and domestic sales in the first quarter. According to a rough estimate, current export prices for cement are at $40-45 per ton versus $30-35 per ton at start of current fiscal year. Previously, cement companies were only exporting to cover their variable cost and, if possible, earn some margin on the trade.But due to rising local demand cement companies can negotiate better prices for their exports now, they said. Faiza Naeem, an analyst at AKD securities, a local brokerage house, margins for the cement manufacturers are expected to remain relatively unharmed in the near term. She said cement demand is expected to grow 18 percent year-on-year basis in this fiscal year. “The impact of increasing coal price will not affect the profits of the cement manufacturers, as high price impact would be transfer to consumers.”
She said the increase in prices of coal is likely to force cement companies to increase Rs 3 per bag of cement, while surge in the electricity generation charges would be around Rs 5 per bag. Both these factors have resulted in an increase of around Rs 8 per cement bag in the total cost of production, she said.
Analysts said cement producers will increase their output prices by Rs 8 to Rs 10 per cement bag in the near future and added only within the past three months, coal prices have increased by 10 percent to $75/t from $68/t.