With many infrastructure projects in various stages of progress, a layman would expect domestic demand of the principal raw material for the construction industry — cement — to be fairly high. Except that such a dramatic growth is yet to be seen, six months into the current fiscal year.

During July-December 2013, local cement dispatches grew by a marginal two per cent YoY to 11.99 million MT, according to Yousuf Rahman, a sector analyst at Global Securities.

But dispatches in the month of December rose by nine per cent to 2.33 million MT. The analyst attributed this to higher utilisation of already-released Public Sector Development Programme (PSDP) funds. Other analysts expect sizable PSDP financial releases to come in the second half of the fiscal year.

Lower exports, particularly to Afghanistan and India in 1HFY14 resulted in total cement dispatches growing by a meagre one per cent YoY to 15.95 million MT.

And some sector watchers paint a somewhat bleak future for the industry in CY14. Cement manufacturers are increasingly facing higher cost pressures, and responding to them by raising their prices.

The revival of the gas development infrastructure cess (GIDC) is particularly worrisome for cement manufacturers that operate gas-fired captive power plants (CPPs). The government has revised GIDC rates on CPPs from Rs50 per mmbtu to Rs100.

Meanwhile, firms that are more dependent on electricity from the national grid are already facing higher power tariffs.

But the industry has also passed on increases in its production cost to consumers to retain its margins. Cement prices in the southern region had reached about Rs505-520 per bag by last month, up nearly four per cent in three months. Prices in the northern region were hovering at about Rs500 per bag. Cement prices were at about Rs300 by June 2010.

Other challenges for the industry, cited by analysts, include the future of the price-setting ‘cartel’, given expansion plans pursued by at least one cement maker. Last September, the manufacturers had reached an agreement to postpone expansion by individual companies till March 2014, after the biggest player in the industry temporarily walked out from the All Pakistan Cement Manufacturers Association (APCMA).

But it must also be noted that these challenges were, more or less, there for the industry in the preceding years as well. Yet, the listed cement sector managed to gain a cumulative 76 per cent in 2013, against the KSE-100 Index’s return of 49 per cent for the year, according to Salman Badami at Topline Securities. The analyst added that 11 out of 19 listed cement companies managed to outperform the stock market in the year.

“During FY13 [July 2012-June 2013], the sector’s profit grew by 93 per cent to Rs30.9 billion, against Rs16 billion in FY12. In 1QFY14, the sector posted a profit growth of nine per cent to Rs6.6 billion, versus Rs6.1 billion in 1QFY13,” the analyst said in a recent research report.

Some of the factors that boosted the companies’ earnings included slightly lower international prices of coal — another important raw material — during the year.

Another factor was the lower finance charges, as interest rates were relatively low during most of CY13.

According to an earlier research report from Topline Securities, financial charges of 12 out of 19 listed cement companies — accounting for about 70 per cent of the sector’s market capitalisation — declined by a sizable 13 per cent YoY to Rs1.5 billion in 1QFY14 alone.

Going forward, construction activity — and by extension, demand for cement — is expected to be closely linked with the release of PSDP funds by the government.

According to media reports quoting government statistics, PSDP funds to the tune of Rs143 billion, or about 26.5 per cent of the total allocation of Rs540 billion for FY14, were released by mid-December 2013.

But any growth in domestic demand is also expected to be countered by a further drop in exports to Afghanistan, in case of a decline in US funding for civilian programmes after the withdrawal of foreign troops from the country.

Meanwhile, the Economic Coordination Committee of the cabinet’s recent approval for importing petroleum coke through the Wagah-Attari border from India might bode well for the local cement industry, as it would decrease transportation costs for Northern zone manufacturers.