Karachi, July 18, 2023 (PPI-OT): Cements: Dispatches report a 16% YoY decline in FY23
Cement dispatches for Jun-23 clocked in at 4.1mn tons showing a 23% YoY decline, taking cumulative dispatches for FY23 to 44.6mn tons, a 16% YoY decline. Dispatches were down during the year due to dull construction activities owing to uncertain economic and political situation, rapidly rising construction costs and high financing costs.
Going forward, lower volumes are expected to be offset by declining costs. Richard Bay coal prices have dropped ~54% since Dec-2022, owing to subdued demand and better supply globally. With ease-off in LC establishment conditions of late, sector margins may improve resulting from purchase of lower priced International coal.
Given durable long-term fundamentals, we continue to maintain an Overweight stance on the sector. Despite potential risks stemming from prolonged weak demand, the sector is expected to remain in spotlight, driven by the continuous decline in international coal prices and the anticipated relative improvement in volumes during FY24.
Sequential uptick witnessed in Jun-23; FY23 remains dim
Cement dispatches for the month of Jun-2023 are reported at 4.1mn tons, showing a decrease of 23% YoY, however there was a sequential improvement despite Monsoon and Eid-ul-Azha. Cumulative figure for FY23 stood at 44.6 million tons, lower by 16% YoY owing to slow-down in construction activities due to uncertain economic and political situation, high inflation triggering an increase in allied material costs and high financing costs.
Substantial decline in coal prices
Richard Bay coal prices have dropped 54% since Dec-2022, owing to dull global demand and better supply. Dull demand outlook is caused by growing concerns over the global economic downturn and approval of lower carbon emission targets for the coming years by coal producing countries. Richard Bay coal now costs less than Afghan coal used by cement manufacturers, relaxation on imports will make it easy for cement producers to avail the lower priced international coal.
In a bid to mitigate the impact of falling global coal prices, Afghan government also decided to lower coal royalties by US$5/ton and customs tariffs by US$15/ton last month which resulted in a decline in Afghan coal prices by ~Rs8k/ton taking prices to around Rs42k/ton for North based players. Moreover, local coal prices have also decreased by Rs2k/ton, reflecting a favorable development for cement
manufacturers amidst the substantial decline in overall coal prices.
Overall outlook remains positive
We have an Overweight stance on the sector, where Maple Leaf Cement Factory Limited (MLCF) and Fauji Cement Company Limited (FCCL) are among our top selections from the sector given their respective timely expansions providing them with the potential to capture higher market shares. We also like Kohat Cement Company Limited (KOHC) because of its active cost controls and low leverage ratios. 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.
Where lower coal prices are expected to support margins, we believe any increase in power tariffs for the sector may limit the benefit for some players.