Karachi, August 17, 2023 (PPI-OT): Cements: Dispatches report 21% MoM drop in July

Cement dispatches for Jul-2023 clocked in at 3.2mn tons depicting a 21% MoM decline. Dispatches were down due to the onset of monsoon season, which dampened construction activities. Rising costs for materials, labour and transport, coupled with high financing costs, are straining profitability for constructors and discouraging new projects.

Going forward, lower volumes are expected to be offset by declining costs. Richard Bay coal prices are down ~46% since Dec-2022, owing to subdued demand. Sector margins would receive a further boost if import restrictions ease which would allow cement players the flexibility to source coal from the most economical option at any given time (International or Afghan).

We maintain an Overweight stance on the sector given long-term fundamentals. Despite potential risks stemming from prolonged weak demand, the sector is expected to remain in spotlight, driven by cumulative decline in international coal prices and the anticipated relative improvement in volumes during FY24.

Decline witnessed in Jul-23 dispatches

Cement dispatches for the month of Jul-2023 are reported at 3.2mn tons, depicting a decrease of 21% MoM, however on a YoY basis numbers seem better due to low base. Slow-down in construction activities is being witnessed due to uncertain economic and political situation, high inflation triggering an increase in allied material costs and high financing costs.

Decline in coal prices amid ease in imports to be beneficial

Richard Bay coal prices have dropped 46% since Dec-2022, owing to dull global demand and better supply. Dull demand outlook is caused by growing concerns over global economic downturn and approval of lower carbon emission targets for coming years by coal producing countries. Richard Bay coal now costs less than Afghan coal used by cement manufacturers but benefit of the same on costs and margin can be fully availed if import restrictions are eased on a sustained basis.

The cost trade-off between Afghan and international coal, however, remains fluid. In addition to PKR depreciation, there has been an uptick in international coal prices primarily fuelled by a notable rise in gas prices and concerns about possible strikes at major global LNG export facilities - which could trigger a substitution to coal.

Outlook on the sector remains positive

We have an Overweight stance on the sector as long-term prospects for the industry remain intact, where we highlight MLCF and FCCL among our top picks, given their respective timely expansions that have the potential to capture higher market shares. We also highlight PIOC for its cost optimization focus and KOHC due to lower leveraged balance sheet among preferred picks.

The combination of falling coal prices and elevated cement prices compared to last year is expected to lead to improved gross margins for cement companies but we believe any further increase in power or gas tariffs may limit the benefit for some players.