THE recently-released financial results of cement companies show that the FY12 profitability of this sector is well-sustained.

And signs of recovery in construction activity indicate that cement firms will end up making more profits in the current fiscal year.

In the last fiscal year, the gains of the sector were driven by a cut in excise duty and initiation of some infrastructure projects though the private sector housing activities also had led to higher demand for cement. This year the demand is being propelled by continuing recovery in construction industry.

The industry’s cost of production came down because of 30 per cent lower international prices of coal since July 1, 2012 (which is consumed as kilning fuel) and use of refuse derived fuel as a still cheaper alternative to coal. The return of inflation to single digit and lower interest rates are also enabling cement makers to cut costs and improve their margins.

Work on public sector infrastructure projects picked up pace right from the beginning of this fiscal year (ahead of general elections). And private housing or commercial projects have gathered momentum particularly in Punjab.

Domestic sales of cement increased eight per cent Year-on-Year (y-o-y) in seven months of FY13 to 13.862 million tonnes from 12.837 million tonnes in the same period of FY12. “This trend looks sustainable as most factors are in favour of it. Cement sales remained high even in October-December quarter which is normally a lean period,” says an official of Fauji Cement which had commissioned a new manufacturing plant in FY12.

Net profit of DG Khan Cement rose 128 per cent in 1HFY13 to Rs2.9 billion from Rs1.28 billion in 1HFY12. A research report of JS Global Capital points out that in addition to other factors an annualised 35 per cent fall in financial charges and 28 per cent decline in selling and distribution cost helped the company earn more.

Lucky also reported 42 per cent increase in its profit after tax which went up to Rs4.3 billion in 1HFY13 from Rs3 billion in 1HFY12. According to company officials, Lucky is setting up a grinding project in Iraq with a capacity to produce 870,000 tonnes of cement per year. They say that the project would become operational by the end of 2013. It is also considering setting up a grinding unit in Sri Lanka.

“Emboldened by firmed up domestic demand, some smaller firms are also thinking about capacity enhancement. Industry sources say this time expansion projects are likely to come up in the southern zone as well which normally lags behind the northern zone,” says an official of All Pakistan Cement Manufacturers Association.

Almost half of all cement companies were reporting financial losses till FY11 but they returned to profitability in FY12 and some, most notably Fauji Cement enhanced production capacity through project expansion foreseeing recovery of demand. On balance, the industry boosted output capacity by five per cent plus to 44.77 million tonnes.

Currently most cement companies are making huge profits on the back of higher local prices, thus offsetting the impact of lower volumes of exports. According to market sources, the price of a 50-kg bag of cement has so far risen by 7.5-10 per cent so far during this fiscal year depending upon the popularity of the brand and distance of sales points from a factory.

According to a research report of BMA Capital Management, half a dozen smaller cement plants are believed to have boosted their production capacity by about nine per cent during 1HFY13.  In first seven months of FY13, total sales of cement (including local sales and exports) exceeded 18.6 million tones, up four per cent from about 17.9 million tonnes in the same period of FY12.

“Even if our current average monthly sales is maintained till June overall sales volumes will rise to 32 million tonnes—representing 71.5 per cent capacity utilisation (up from 70 per cent in FY12),” one of the industry sources said.

He opined that average monthly sales between February and June “would be even higher” due to seasonal pick up in local demand. “Work on public sector projects including small dams and roads and bridges has accelerated in the second half of the fiscal year,” he argued.

Officials of cement companies say though exports to traditional buyers — India and Afghanistan — have been on the decline, they expect a pickup in demand from Bangladesh, Sri Lanka and Iraq. “Mega construction projects are coming up in these countries and because of lower coal prices and lower tax incidence plus stable interest rates we hope to remain competitive in cement supplies,” said head of operations of a manufacturing plant located in southern zone.

He said steady growth in profits of cement companies that has helped them offer handsome return to their shareholders and drive up the KSE-100 index, is also likely attract some foreign investment in near future.

In first seven months of FY13 cement sector attracted about $5 million net foreign direct investment whereas in the same period of FY12 the sector had seen a net outflow of more than $6 million. “This is in addition to portfolio investment being attracted by our best performing cement stocks.”

Industry sources say that some investors from the UAE are looking for opportunities to invest to ensure steady supply of cement to a couple of construction projects in Pakistan owned directly or indirectly by Gulf-based business groups.