Cement industry profitability declines by up to 80%

LAHORE, Nov 02 (INP): The overall profitability of cement industry has dropped enormously by up to 80 percent during the FY19 as compared to the previous year mainly due to increase in input cost and drop in sales’ growth.

According to the industry experts, different cement companies have registered a decline in profitability considerably, as the profit of DG Khan Cement was down by 82%, Kohat Cement profit was declined by 17%, Bestway cement profit was dropped by 23%, Cherat cement profit was lowered by 17%, Attock cement profit was decreased by 53%, Lucky Cement profit was down by 14% and Mapleleaf cement profit registered a downfall of 60%.

The industry experts said that profitability of the cement industry was continuously declining for the long time and the situation keeps on worsening amid increase in input cost and heavy duties and taxes on cement consumption, they added.

They said that the Pakistan cement industry in 3QFY19 had posted its lowest gross margins of 23.6% since 2011 amid higher input costs, lower local demand and weak pricing power. Consequently, industry’s pretax earnings had fallen by 25% YoY (-19% QoQ) during the outgoing quarter.

Experts said that decline in the sector’s net earnings was restricted to 10% YoY in 3QFY19 thanks to lower effective tax rate, down 15ppts to 7.7%. Margins contracted amid lower local demand, weak local prices and higher input costs. To note, sector’s GP margins have been under pressure since Jan 2017. Industry volumes down 9% YoY in 3QFY19 amid 15% decline in local sales. However, exports grew exponentially by 51% YoY thanks to currency devaluation, additional production from new capacities in South and higher clinker sales to regional countries.

They said that over the past six months, cement dispatches have fallen month after month. In April 2019, they peaked at 4.6 million tons but by Aug this year had come down by 28 percent. Contribution of exports into total sales however has grown. In FY19, exports were 14 percent of all dispatches, up from 10 percent during FY18. It looks like the growing trend of exports will continue through FY20 as Jul 2019 saw exports as a share of total dispatches climb to 15 percent (Jun-19: 10%), and further climb up to 20 percent in Aug 19. In fact, 72 percent of the exports are originating in the south zone which indicates that they are being sold off into markets abroad, which also implies that it is the lower value-add clinker, which is drawing profit as compared to the cement.

Industry experts said that demand compression will certainly affect capacity utilization as well as the profit of the industry, leaving the plants further idle and unutilized.
INP/AJ/LK