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The Concrete Connection, (AKD Monthly Report, June 15' 2023)

Pakistan Cement Sector Monthly Report

 

The Concrete Connection 

AKD cement universe has shown great resilience, gaining 18.6% over CYTD and outperformed the KSE100 index performance by 16.9% during the same period. The said performance is majorly attributable to solid earnings growth amidst the overall cyclical downturn in the economy presently, wherein profits of AKD universe have risen by 11.6%YoY during 9MFY23. The elevation in earnings is mostly due to the rising cement prices (46%YoY)alongside declining input costs i.e. fuel (55% of COGS). The said positive developments offset the impact of 18% decline in the cement offtakes in 9MFY23.

Federal Budget 23-24: GoP announced FY23-24 budget recently where Federal PSDP allocation has been set at PkR950bn, while allocation under public private partnership is being targeted at PkR200bn. In addition, provincial PSDP is targeted at PkR1.56tn, taking the total PSDP allocation to PkR2.7tn for FY24. Although the highest ever PSDP allocation, its utilization remains questionable due to limited fiscal space amidst heavy debt servicing costs. Be that as it may, election year exuberance could lead to GoP being motivated to spend towards public works, bolstering construction demand leading to marginal improvement in cement offtake going forward. Finally, imposition of super tax could impact the profitability by 8% in FY24.

Settling coal prices: International coal prices have plummeted recently, touching the lowest level since Jun’21, with RB coal prices currently hovering at US$106/ton vs. CYTD avg. of US$135/ton, down 19%. This decline in coal prices internationally is attributable to warmer weather in Europe (diminishing demand for heating fuel), alongside lesser than expected economic growth (especially from China. i.e. world's largest coal consumer). However, a surge in prices is anticipated as China has just began stockpiling for summer. On current prices, landed prices of South African coal calculates to PkR39.7k/43.7k/ton in South and North, respectively. Meanwhile, prices of Afghan coal also fell to PkR50k/ton compared to average of PKR54-56k/ton in the outgoing quarter.

Pricing Power prevails: Industry has sustained its pricing power despite ongoing expansionary cycle (17% increase in capacities till now) alongside falling utilization levels off 58.6% in 9MFY23 vs. 74.9% in FY22. Average cement bag price currently stands at PkR1,142/bag vs. avg of PkR770/bag in FY22. We expect this pricing power to prevail and cement companies not to enter in a price war as was the case in FY17, lately.

Outlook on May’23 numbers: Total sales volume in May’23 clocked in at 3.97mn tons, up by 34.4%/19.4%. The massive increase in the offtake in the outgoing month may possibly be due to preemptive buying amidst the anticipation of rising cement prices post federal budget’24. The increase in the monthly offtakes comes more than expected. South sector remain the major growth catalyst, as domestic offtakes increased by 57.5%/15.4% MoM/YoY to settle at 0.66mn tons. Meanwhile, North domestic volumes also posted positive growth of 31.2%/7.6% MoM/YoY, to clock in at 2.77mn tons. Whereas, exports witnessed a mammoth 26.7%/210.1% MoM/YoY growth as export prices become more viable amidst declining coal prices. Cumulatively, 11MFY23, sales volumes clocked drops by 15%YoY to settle at 40.5mn tons, compared to 47.6mn tons in SPLY.

Company-wise 10 Month breakup: Volumes of MLCF have shown resilience, where total sales volumes declined by 9%YoY in 10MFY23. Main contributors towards the resilience sales volumes is due to increase in the market share of the company amid capacity expansions. On the flipside, DGKC and LUCK sales volume declined by 29%/22%YoY in the ten-month period owing to 60%/41% drop in the exports, respectively. Whereas, exports started witnessing growth as coal prices started to taper down. In lieu to the increasing exports, these two companies would be the biggest beneficiaries. Furthermore, companies with recent capacity expansions (LUCK, MLCF & FCCL), remained comparatively better-off due to increase in their market shares.

 

AKD Research