Pakistan: cut in discount rate should benefit cement sector

Pakistan's cement sector remained the major beneficiary in the reducing interest rates scenario being one of the major leverage sectors thanks to massive allocation of Public Sector Development Program (PSDP).

The cement volume growth may cross the figure of 4 per cent in FY2013-14, as the National Economic Council has approved a 32 per cent hike in PSDP allocation to PKR1155bn (US$11.7bn) in upcoming budget, with share of the federal government at PKR540bn (US$5.5bn) and provincial share of PKR615bn (US$6.2bn).

Industry experts claimed that local cement production growth will touch at least four per cent in FY14.

Moreover, so far in the closing FY12, higher domestic cement prices stand at an average of PKR9768/t (up by significant 10 per cent YoY). This phenomenon has attracted attention towards tweaking the estimatese for the sector. As expected, net retention for FY14 to reach the level of PKR7815/t (up by impressive seven per cent YoY).

It is believed that rejuvenation in the demand coming from local front to propel sectors' profitability during the period under consideration.

During FY13 Richard Bay coal prices on international front has posted a decline of 20 per cent to US$76.55/t. Coal contributes about 40 per cent in total costs of cement production in Pakistan. Being the net importer of coal to heat up burners, the declining coal price is another factor that adds positively in the gross margins of the sector.

If low coal prices, coupled with a stable rupee against the US dollar, will provide low cost raw materials to the sector, this will further strengthen producers' profitability.