PAKISTAN: Cement sector to take time to get out of troubled waters

KARACHI: The cement sales during the two months of the fiscal year 2010-11 have come under the hammer as the worst-ever floods in the country have dampened its demand and it might take a long time to recover, analysts said.

However, the damage to plants has been limited, despite being near the flooded areas.

Though sales pressure has picked up in August 2010 and price stress in the extreme North, by and large, cement prices look to remain stable in the medium-term, analysts said and added that the second half of FY 2010-11 may see the first signs of recovery.

The fiscal year 2010-11 has started off on a very divergent note as against FY10, with weak cement offtake. The yearly cement volumes are reported at 16 percent lower and the full impact of massive nationwide flooding is still expected to manifest in the next one to two months. 

Recovery prospects: Agriculture income growth and government infrastructure spending - two key historical drivers of domestic cement demand - will be absent in FY11. The former, given devastation to cropped area and livelihood and the latter given limited government fiscal space, which will likely be further squeezed by floods.

Recalling post FY 1993 floods, cement demand rose in the affected year but slumped for two full years before swinging up 13 percent in FY 1996, while in the post earthquake in October 2005 demand remained strong (plus 14 percent and plus 24 percent in FY 2006 and FY 2007, respectively.

Drilling down into July to August 2010 sales: Heavier-than-normal monsoon rains and late July 2010 floods have hit cement demand, more strongly manifested in August 2010 sales (domestic sales were down a sharp 25 percent on yearly basis). On the domestic front, weaker volumes are seasonal in the first quarter as typically the impact of monsoon rains and Ramadan slow down the construction activity. 

The latest number for the month of August indicated that the local cement sales plunged by 26 percent on yearly basis as compared to the same period last year.

According to the All Pakistan Cement Manufacturers Association’s figures cement sector has showed dismal performance during August 2010. Cement dispatches are down mainly due to floods, which affected construction activities and also in Ramazan where activities usually slow down.