Karachi, The Pakistani cement industry faced a notable downturn in January 2024, with dispatches sliding by 15% year-over-year, influenced by a slowdown in private construction activities and a pause in major public projects due to ongoing elections. This decline was also partly attributed to the aftermath of the high base effect from the previous year's post-flood reconstruction efforts and the regulation of axel load limits, As per a report by AKD Securities Limited.
According to AKD Securities Limited, the northern region experienced a significant decline in domestic sales, dropping by 18.8% month-over-month and 16.5% year-over-year, mainly due to seasonal impacts of harsh weather conditions on construction activities. Exports from the north also saw a substantial decrease of 35.7% month-over-month, largely due to border tensions leading to an 11-day closure at the Pak-Afghan border. Conversely, the southern region witnessed a modest 3.0% month-over-month decline in domestic sales, while exports suffered due to increased freight premiums amidst the Red Sea crisis.
Despite these monthly setbacks, the cement industry's total sales volume for the first seven months of the fiscal year 2024 showed a 6% year-over-year increase, reaching 27.3 million tons. This growth was primarily driven by heightened sales in the initial two months of FY24, benefitting from the low base effect of the preceding year.
The report also highlighted the recent decline in international coal prices to US$92.25 per ton, following reduced winter demand from Europe, offering a potential relief for the cement industry by mitigating the impact of axel load regulation enforcement. However, the north continues to rely heavily on local coal due to the rising costs of Afghan coal, which has shifted from a discount to a premium compared to international prices.
From an investment perspective, AKD Securities anticipates local dispatches to remain flat year-over-year in FY24, with a forecasted 4% growth in total sales volumes driven by increased exports. However, challenges such as the ongoing Red Sea crisis and high sea freight costs, coupled with slow interest rate cuts amidst persistent inflation, may pose risks to this growth. Despite these challenges, the sector's strong pricing power, high gross margins, and the recent dip in coal prices provide a basis for optimism. AKD Securities maintains a bullish outlook on the sector, recommending LUCK, FCCL, and MLCF, with December '24 target prices of PkR1,074, PkR32, and PkR58 per share, respectively.
This analysis by AKD Securities offers a comprehensive view of the current state and future prospects of the Pakistani cement sector, underlining the impact of macroeconomic factors and industry-specific challenges on its performance.