Another blow to construction industry: cement prices hovering near peak

Another blow to construction industry: cement prices hovering near peak

KARACHI: Skyrocket cement prices are another blow to the construction industry because massive surge in steel prices already badly dented the industry.

Cement demand has shown significant decline in seven months (July – January) of fiscal year 2022-2023 amid slowdown in spending of both public and private sector.

The government spending has remain muted in recent months due to ongoing political tug of war and tight fiscal space. While, private sector spending has also recorded massive slowdown due to rising cost of construction, making the projects unviable.

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Despite that, cement prices witnessed an increase of 67 per cent to Rs1,100-1,120 per bag, since June 2021.

The increase is mainly due to higher raw material prices on the back of upward rally in coal prices coupled with inflationary pressure, said Ali Asif, analyst at Insight Securities.

Moreover, recent increase in Federal Excise Duty (FED) and sales tax on cement bags has further escalated the prices by Rs50 per bag on February 16, 2023.

It is pertinent to mention that the Association of Builders and Developers (ABAD) has already boycotted the purchase of steel / iron bars due to recent price hike. The spike in cement prices will aggravate the state of construction industry.

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Cement offtakes remained weak in first seven months of the current fiscal year clocked in at 25.76 million tons, down by 18 per cent amid burgeoning cost of construction, higher interest rates, low Public Sector Development Program (PSDP) utilization and political uncertainty.

To note, PSDP and private investments remains a key demand drivers for construction sector. In 7MFY23, actual PSDP spending clocked in at PKR203.1bn vs. authorized amount of PKR371.8 billion.

The decline is due to ongoing political & social turmoil in the country which was further exacerbated by narrow fiscal space. Going forward, PSDP allocation and utilization are expected to remain muted due to acute fiscal space amid rising cost of debt servicing.

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In the current fiscal year, allocated budget for PSDP was PKR727 billion, but only PKR371 billion has been authorized in 7MFY23, with actual expenditure amounting to PKR203 billion.

Due to low PSDP spending, demand for construction material remained depressed as they are highly correlated with PSDP spending. Cement sector is facing the burnt of this slowdown as reflected in 18 per cent decline in dispatches during first 7 months of FY23.

Offtakes are expected to remain muted in next 2 months due to Ramzan season as evident from past trends. The worries of the sector has further exacerbated by commissioning of new capacities. To note, 11.52MT capacity has been added FY23TD, taking industry’s total capacity to 84 million tons.

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Pakistan has heavily relied on private sector as their primary producer of goods and services. However, due to economic upheaval led by elevated inflation, skyrocketing interest rates, PKR devaluation and political uncertainty, private sector spending has significantly reduced, resulting in construction cost overruns.

Moreover, as steel industry is undergoing raw material shortages amid import restrictions, these factors may only serve to further contract cement demand since construction industry is closely interconnected. We believe due to aforementioned reasons, cement offtake will decline by 15 per cent in FY23 to clock in at 44.9 million tons compared to SPLY.