Equity Analysis /
Pakistan

Pakistan Cement: Cement prices have surged but not yet adequately

  • Cement prices in the North region have increased by PKR40-50/bag, setting a new record of c.PKR840-850/bag

  • Cement producers have so far passed on the cost increase up to US$250/ton equivalent of coal price impact

  • Each US$10/ton increase in coal prices would warrant PKR12-15/bag increase in cement prices to be fully passed on

Intermarket Securities
14 March 2022

Third price hike in the last 15 days: As per channel checks, cement prices in the North region have increased by PKR40-50/bag, setting a new record of c.PKR840-850/bag. This is the third consecutive hike in the past 15 days, taking the total price increase to PKR150-160/bag. The prime reason for increasing prices is to pass on the massive increase in global coal prices – which surged to its all-time high of c.US$455/ton in March but are presently hovering at US$355/ton – coupled with higher transportation costs amid rising petroleum prices.

We expect more price hikes if coal prices remain around present levels: We estimate that cement producers have so far passed on the cost increase up to US$250/ton equivalent of coal price impact. If coal sustains the US$300/ton level, then cement producers will have to increase prices further: each US$10/ton increase in coal prices would warrant PKR12-15/bag increase in cement prices to be fully passed on. The Cement industry has been slow to increase prices; this is majorly due to weak demand amid peak winter season in North and overall elevated cost of construction as prices of other key inputs have risen drastically as well.

Local and Afghan coal have been major saviors for North producers: Almost all the North producers are substituting imported coal (majorly from South Africa) with local and Afghan coal, between 20-50% of total coal usage (mostly Afghan coal) depending on the availability and each company’s plant specification. Presently the landed cost of Afghan coal is around US$170-200 per ton. South players, on the other hand, are still majorly using Richard Bay coal while local cement prices in the region are hovering around PKR860-880 per bag.

Coal constitutes the major input cost for cement producers, some of which (DGKC, PIOC and MLCF) are more sensitive to coal due to greater reliance (by virtue of coal-based captive power plants). Refer below earnings sensitivity of IMS cement Universe for FY23 at different coal prices.

Marketweight: The sector has seen massive price correction recently (down c.13% CYTD). A de-escalation of Russia-Ukraine conflict is pertinent for international coal prices to normalize in the next few months. Despite slower demand growth in FY23f and higher interest rates, earnings of the IMS Cement universe will be supported by elevated domestic prices. Therefore, we reiterate our Marketweight stance on the sector where our top picks are LUCK (TP: PKR1,000/sh) and  MLCF (TP: PKR50/sh).