Cement sector feels pinch of monsoon rains, sales decline 26%

KARACHI: Monsoon rains have dampened construction activities in Pakistan; therefore, cement offtakes have declined by 26% so far this year compared to the same period last year.

Cement dispatches for August 2024 clocked in at 3.37 million tons, a decline of 26% compared to the corresponding period of the previous year of 2023, largely attributed to a slowdown in construction activity, exacerbated by heavy monsoon rains, according to AKD Research.

Average cement prices in the North have risen by Rs 43 per bag in the previous month, following the increase in royalty rates by the Punjab government, to hover around Rs 1,530 per bag.

The brokerage house forecasted that local cement demand to dampen further by 2% to 2.5% this fiscal year compared to last fiscal year. Meanwhile, exports of cement are expected to outperform the previous year, subsequently, total cement offtakes are anticipated to remain flat on an annual basis.

Overall, inflation in the country is slowing down. Headline inflation for the month of August 2024 dropped to 9.6% year on year and 0.4% month on month, the lowest in almost three years. This was in line with expectations amid sticky food prices and an uptick in a few core segments. The housing and utilities segment, which has a 24% weight, posted a month-on-month fall of 1.4%, mainly due to a downtick in electricity charges.

Elsewhere, the national consumer price index (NCPI) in urban areas and rural areas was recorded at 11.7% year on year and 6.7% year on year, respectively. Core inflation in urban areas dropped to 10.2% year on year in August 2024 from 11.7% year on year recorded in July 2024. Similarly, core inflation in Rural areas decreased to 14.4% year on year in August 2024 compared to 16.9% year on year recorded last month.

Moreover, the sensitive price indicator (SPI) was up 10.8% year-on-year in August 2024, compared to a 15.7% year-on-year increase in July 2024. Further, the wholesale price index (WPI) for August 2024 stood at 6.3% year on year (10.4% year on year in July 2024). Consequently, our base case NCPI expectation for Fiscal Year 2025 arrives at 10.7% year on year.

The State Bank of Pakistan’s Monetary Policy Committee (MPC) is scheduled to meet on September 12, 2024, where we expect the MPC to cut the benchmark policy rate by 100 bps to 18.50%. Market sentiment, reflected in the fall of the Karachi Interbank Offered Rate (KIBOR) and yields on Treasury Bills (T-Bills) in particular, coupled with a significantly positive real interest rate on a forward basis, points towards a bigger rate cut.

However, given the delay in the full adjustment of utility prices, volatile oil prices, and the need to support the Rupee amid delays in securing the International Monetary Fund (IMF) Board approval, a cautious approach to rate cuts is likely.