The stock prices of both LUCK and DGKC had unperformed the market one week and one month following the Competition Commission of Pakistan (CCP) raid on the offices of All Pakistan Cement Manufacturer Association (APCMA) on April 24, 2008 and later convicted the industry and imposed a fine of Rs6.3 billion on the industry on August 27, 2009. This time CCP once again raided APCMA and Kohat Cement on suspected cartelisation within the sector yesterday. Since prices are the biggest driver of earnings for the sector any major downward adjustment in prices poses a risk to the earnings expectations for FY12 for both LUCK and DGKC. So, the historical trend of cement prices CCP’s actions shows that the cement sector’s profitability is highly sensitive to cement prices. Interestingly, despite the raid on April 24, 2008 cement prices had improved on a QoQ basis by 16 per cent in 4QFY08. Further rise was seen in average retention cement prices by 33-39 per cent on a QoQ basis during 1QFY09, thus indicating that the threat of a vigilant investigation had not disturbed the pricing power within the sector. Conversely, a different trend was witnessed after imposition of a fine on the industry in August 2009. Average retention prices dipped in September 2009 by 10 per cent and than by four per cent in October 2009. Considering that cement prices are up by approximately 8-9 per cent QoQ in 2QFY12, while coal has dipped by nine per cent QoQ in the same period cement manufacturers may opt for a less confrontational strategy. ‘As a result, minor downward adjustments cannot be ruled out. However, a major plunge in cement prices will affect our earnings forecast for both LUCK and DGKC,’ said Furqan Ayub at JS.
