Intl coal price-hike poses no significant threat to cement sector

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The cement dispatches for the month of January 2012 grew by 2.32 per cent Year-on-Year (YoY) to stand at 2.54 million tonnes compared to 2.49 million tonnes in the corresponding period last year, show the data released by All Pakistan Cement Manufacturers Association (APCMA). Total cement dispatches in 7MFY12 stood at 17.95 million tonnes, up 3.94 per cent YoY, which previously stood at 17.2 million tonnes in the corresponding period of last year. Local dispatches during the 7MFY12 showed growth of 7.21 per cent to 12.89 million tonnes, while exports remained on negative side, and posted a decline of 3.59 per cent to 5.05 million tonnes. “Cement demand is expected to remain flat till March-12 due to prevailing winter season and lack of infrastructural development, while the cement consumption in the country is expected to head up from April-12 onwards,” said Yawar Uz Zaman, an analyst at InvestCap Research.
The analyst said international coal prices increased by 18 per cent YoY during the first half of FY12, which alongside rupee depreciation of average two per cent YoY during the same period signify cost pressures. With exports dwindling on the broader scale and rising tilt of dispatches towards domestic market, the impact of costlier coal as a result of rupee devaluation has escalated. “However, the sector did manage to maintain higher cement prices at the local front in an attempt to cater to cost pressures,” Zaman said.
In this manner, he said, local cement prices recorded a healthy increase of 23 per cent YoY during 1HFY12, providing buffer not only against higher coal prices, but also against slower exports and rupee depreciation. So far, mainstream companies had posted healthy increase in gross margins during 1HFY12 as a result of better pricing as well as materialisation of cost controlling measures. The analyst said, although coal prices had shown further strength during the month of January, being up by four per cent MoM on average basis, but the increase was deemed to be a seasonal phenomenon related to coal demand in the winter season. The said increase, Zaman said, would likely revert in the coming months owing to lack of triggers offered by the demand side going forward.
Moreover, he said, the coal price trend so far during FY12 was much more stable compared to the last two year trend. “We see coal prices at current levels presenting no significant threat to cement sector profitability in coming quarters.” The cement industry, Zaman viewed, continued to remain one of the highly leveraged sectors of the country, where most of the companies faced lofty financial burdens on the income statement. “However, reduction in the policy rate by 200bps during FY12 will benefit leveraged companies within the sector,” he said. This coupled with favorable pricing scenario, up tick in domestic demand and higher realisation/allocation for PSDP during FY12/FY13 on the back of popular decisions expected to be taken by the government was likely to put the cement sector in a better position, said the analyst.