The Cement industry in Pakistan is facing hard times as its quarterly profits recorded a 38 percent year-on-year drop.The main reason of this drop in the profits is the high cost of production.These are the lowest margins in last six years.
Cement manufacturers earned Rs8.536 billion during the first quarter of 2018/19 compared to Rs13.746 billion in the corresponding period a year earlier.It’s a big drop in just last three months.
The cement industry posted its fifth consecutive fall in quarterly profits. The gross margins in the cement industry have now contracted to 24 percent (6-year low), as compared to a high of 46 percent in the fourth quarter of 2016.
Pakistani cement industry enjoyed high profit margins for some years but it seems coming to an end. The average margin in South Asia is between 20 to 25 percent. But margin in Pakistan was almost double that of South Asian margin of cement industries. It is most likely that margins would be in the range of 25 to 30 percent.
Even though, the domestic demand almost flat but exports continue to grow. The industry enjoyed 39 percent growth in exports. The main reasons of these higher exports are currency devaluation, additional production from new capacities in south and higher clinker sales to regional countries on the back of closure of some clinker production lines in China owing to strict environmental regulation.
The market analysts believed that margins continued to fall amid increase in production costs on an 18 percent increase in coal prices during the first quarter, an increase in re-gasified liquefied natural gas cost due to higher international oil prices, currency devaluation and weak pricing discipline owing to oversupply concerns.
Financial charges were up by a considerable 2.5 times as producers’ books are now heavily leveraged owing to capital expenditure requirements to fund upcoming expansions coupled with higher interest rates. The benchmark interest rate has now reached to 8.5 percent with increase of 275 basis points since January.
Effective tax rate of the industry remained well below 20 percent due to tax benefits on account of investment in new cement lines and adjustment of deferred taxes.
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17 November, 2019