Karachi, January 10, 2022 (PPI-OT): Cements: Dispatches decline 4% YoY during 1HFY22

As per the latest data, Cement dispatches for December stood at 4.6mn tons, taking cumulative dispatches for 1HFY22 to 27.5mn tons, down 4% YoY. The primary reason for the decline is higher base during same period last year. Dispatches were impacted due to slowdown in construction activities owing to winter season and rainfall across the country.

The second quarter dispatches depict a sequential rise in volumes which is likely to bear positives for most cement players across the board. In addition to this, comfortable cost of coal inventory will also enable stability in quarter’s gross margins. However, a price hike is warranted in 4QFY22 if international coal prices continue to remain at current levels.

Coal prices have risen sharply during the last week due to an abrupt ban by Indonesia on coal export. We see coal prices normalizing going forward and cement companies to likely procure coal at lower rates in the coming months, reflecting from 4QFY22 onward.

Cement dispatches remained subdued in December

Cement dispatches for December clocked in at 4.6mn tons vs. 4.7mn tons in the corresponding period of last year, reporting a decline of 4% YoY. The primary reason for the decline is higher base during December last year. Dispatches were impacted in the outgoing month due to a slowdown in construction activities amid winter season and rainfall across the country.

Local dispatches were 2% lower on a MoM basis while exports saw a decrease of 23% on a MoM basis. Local dispatches for the Northern region clocked in at 3.4mn tons for the month of Dec-2021, depicting a decline of 3% YoY. Whereas, exports from the region decreased by 78% on a YoY basis.

Local dispatches for the Southern region clocked in at 680k tons during the month, a 1% YoY drop. Cement exports, which constitute a major chunk of total dispatches from the region, also witnessed a decline of 1% YoY in Dec-2021.

Second quarter bearing positives

On a QoQ basis, however we observe a rise of 14% in total dispatches as the last quarter was impacted heavily by monsoon season as well as festive holidays. On the other hand, coal price also dropped significantly in the outgoing quarter.

However, on a YoY basis, dispatches were 3% lower during 2QFY22 where local dispatches remained flat. Exports during the quarter decreased by 19% YoY mainly due to lower exports from the Northern region. Local dispatches for the Northern region remained largely stable at 10.7mn tons. On the other hand, local dispatches from the Southern region increased by 6% on a YoY basis.

Our channel checks suggest, for 2QFY22, most cement companies hold coal inventory at lower than US$150/ton and thus cement companies are likely to show only a marginal decline in gross performance on a sequential basis, thanks to the recent price hikes. Nevertheless, we believe that if coal prices stay at these high levels, 4QFY22 will likely witness a higher impact as average cost of coal inventory would be ~US$150/ton+, which warrants a further price increment to neutralize cost impacts.

Volatile coal prices might not be a concern post winter

We see coal prices to normalize going forward and cement companies to likely procure coal at lower rates in the coming months, reflecting 4QFY22 onward. Also inferring from Richard Bay coal commodity’s futures trading in backwardation, it is prudent to assume a lower average cost for future.

Coal prices have risen sharply during the last week due to an abrupt ban by Indonesia on coal exports until the end of January over domestic shortage concerns mainly to avoid power outages as the country heavily relies on coal for power generation. The government is yet to reach a definite decision regarding resumption of exports.

Before this, prices had dropped significantly in the last two months, after Richard Bay hit a high of US$229/ton in October, owing to China’s decision to ramp up its own coal production by around 100mn tons since the country was facing a severe power crunch. China had also placed a cap on prices so as to rationalize coal costs. Due to these measures, China has recently been less reliant on imports and, since we are already halfway in the winter season, it is less likely to see any sharp spike in global demand for coal.