The year has proved to be a problematic one for local cement manufacturers. In addition to the catastrophe brought by the floods, the government’s inability to focus on developmental activities due to a 77 percent decline in the Public Sector Development Programme (PSDP) allocations contributed to the difficulties.
An increased cost of coal (average price/tonne up by 27 percent since last year) hampered the industry on the demand and cost fronts. However, with disbursement of Rs710 billion with Rs280 billion at the federal and Rs430 billion at the provincial level, the effective utilisation level of the PSDP is expected to be around 30-40 percent in FY12.
Keeping in mind the fiscal burden on the economy, analysts believe anything above the level of FY11’s usage should be considered a positive trend. A decrease in the price of coal (down by seven percent since last year) along with retention prices of Rs4,800/tonne are expected to support the industry’s revival.
FY11 dispatches stand at 25.7 million tonnes (down by nine percent since last year), FY12’s dispatch level is expected to be around 31.5 million tonnes, which constricted by seven percent in annual terms. A revival of much dampened demand can also be expected in the case of a majority of major projects such as dams and linings of canals, being built in the aftermath of the floods. Subsequently, this is likely to provide the industry with better profit margins as prices in the domestic market are better than that in the international market. “On the whole, we expect the upcoming budget to have a limited effect on the cement industry,” said Asad Siddiqui at Investcapital.
Also, the Federal Excise Duty (FED) is expected to remain at Rs700/tonne due to a government’s escalated revenue collection target of Rs1.9 trillion. The government is not expected to provide relief on any revenue generating measures. The Special Excise Duty (SED) also follows a similar trend and is expected to remain at its current level of 2.5 percent. Additionally, there are no expectations for a relaxation in the General Sales Tax (GST) this year.
As the government has vowed to remove all subsidies under IMF’s programme, the inland freight subsidy is expected to be shelved during FY12. Furthermore, the import duty structure for used tyres is expected to remain constant, despite the desire of cement makers to use them instead of coal or furnace oil for cost efficiency. However, the mentioned factors are not going to have a significant negative impact on the sector.
