Return to prosperity forecast for Pakistan's cement sector

Pakistan's cement industry is likely to prosper in the coming months, due to some positive developments at the local and international level, anticipated by three of Pakistan's leading research houses.

BMA Capital Management forecasts that the cement sector is showing signs of revival, backed by initiation of the Naya Pakistan Housing Scheme and construction package announced by the government. Moreover, the easing of lockdowns has raised hopes for improved cement dispatches in the coming months.

Meanwhile, Al Habib Capital Markets states that cement dispatches are estimated to increase modestly due to the gradual easing of lockdowns and the possible announcement of relief measures in the Budget FY21, aimed at increasing construction-related activities.

In addition, Intermarket Securities adds that, despite a slow demand outlook, cement sector profitability is likely to resurge in FY21/22. This would be due to key supporting factors, such as lower international oil and coal prices (energy cost savings) and a steep decline in interest rates by the Central Bank of Pakistan.

It estimated that cement demand and prices will rebound strongly from the 2HFY21 onwards, when the COVID-19 pandemic is expected to be more manageable. Thus, the government will likely have more fiscal space to push construction activity – especially the low-cost housing scheme.

Intermarket Securities has upgraded the estimates for the cement industry, in light of the steep declines in international coal and oil prices, and the abrupt and significant cuts in interest rates in Pakistan. Lower coal prices (down 26 per cent YoY in the 4QFY20) is a boon, as coal remains the most significant input cost, along with a shift to furnace oil for power. Secondly, the decrease in interest rate by 525bps will drastically reduce finance costs and boost the bottom-line.

The analytical company, however, remains conservative on its demand growth outlook until the end-1HFY20. It foresees a five per cent YoY growth in FY21 (last six months) and 7-8 per cent YoY growth in the ensuing years. Whereas, during FY19/20 the sector saw intense price competition, where even the major players pushed sales at low prices. It believed that the government could have better fiscal space to push infrastructure from the 2HFY20 onwards. Thus, cement prices will start recovering more strongly.

It anticipated that retail prices will rise to PKR610/bag (US$3.75) in the north and PKR700/bag in the south by the end of FY21, from PKR480/bag and PKR620/bag, respectively, in March 2020.

Having said that, the risks of lower cement prices and depressed demand had not been wholly allayed. Weakness can emanate from the lack of an increase in government spending from FY20 levels (flattish budget allocation or PSDP), a delay in the start of low-cost housing schemes or a concurrent slowdown in exports. Prolonged lockdown conditions could also lead to severe liquidity issues for some producers.