Karachi, December 09, 2022 (PPI-OT): Cement: Nov-2022 demand remains dull over slow-down in construction activities

As per the latest data, cement dispatches for Nov-2022 stood at 4.0mn tons (-17% YoY), taking cumulative dispatches for 5MFY23 to 17.9mn tons, down 22% YoY, over slow-down in construction activities and impact of floods.

Cement sector remains structurally viable and is expected to get back on the radar in coming months once coal prices start to soften from here.

We have an Overweight stance on the sector, where Lucky Cement Limited (LUCK) and Maple Leaf Cement Factory Limited (MLCF) are among our top picks. Unfavourable repercussions of upcoming capacity additions by cement manufacturers, remains among key risks to our investment thesis.

Dim dispatches for Nov-2022 as well

Dispatches for the month of Nov-2022 clocked in lower at 4.0mn tons, vs. 4.8mn tons in the corresponding period last year, reporting a decrease of 17% YoY. Dispatches were also down on a MoM basis by 6%. Consequently, cumulative dispatches for 5MFY23 clocked in at 17.9mn tons, depicting a decline of 22% YoY due to slow-down in construction activities and aftermath of floods.

Local dispatches for the Northern region clocked in at 3.2mn tons for the month of Nov-2022, depicting a decline of 9% YoY. Whereas, exports from the region improved and grew by 88% on a YoY basis. Local dispatches for the Southern region clocked in at 698k tons during the month, a 7% YoY increase. Cement exports, which historically constituted a major chunk of total dispatches from the region, have declined significantly in the last couple of months, witnessing a drop of a massive 93% YoY during Nov-2022. A table with provisional company-wise numbers is shared in the end.

Alternative coal sources help control costs

Coal prices are a cement manufacturer’s major cost and comprise around 40-45% of the Cost of Sales. Due to the skyrocketing prices of imported coal brought on by the Russia-Ukraine conflict over the past few quarters, most cement producers increased their consumption of Afghan coal and local coal from Darra Adam Khel and Dukki, which was reflected in recent quarters’ stable and/or rising gross margins. Assuming a mix of 90% from the aforementioned blend of Afghan and Local coal and the remaining from international coal for cement companies in the North, the cost of consuming coal works out to be Rs49,000 per ton, which is Rs 16,000 per ton (or 25%) cheaper than the landed cost of South African coal at prevailing rates, this differential was around Rs6,000 at the start of November.

Richard Bay coal prices are down by ~33% to compared to their high of c. US$360/ton in early Sep-2022. The international coal market however is still unstable owing to lack of clarity on demand outlook for the commodity. Once international coal prices follow a downward trajectory from here post winter, local manufacturers are likely to switch back to the South African variant due to its consistent product quality and stable supply chain.

Attractive valuations on offer

We have an Overweight stance on the sector, where Lucky Cement Limited (LUCK) and Maple Leaf Cement Factory Limited (MLCF) are among our top picks from the listed space due to their respective timely expansions leading to the potential to tap higher market shares in the upcoming year. We also have a liking for Kohat Cement Company Limited (KOHC) because of its outstanding gross level performance, a direct result of its proactive cost management and low leverage ratios. Unfavourable repercussions of upcoming capacity additions by cement manufacturers, remains among key concerns. On the other hand, any decline in coal prices is an upside to our base case.