Karachi: Cement sector recorded 9 per cent drop in profitability for the first quarter of the year ended September. Aggregate profit after-tax of almost all units combined stood at Rs1,030 million for 1QFY10, compared to Rs1,131 million in the corresponding three months of the previous year.

Cement units located in the North were seen to have endured bigger loss of Rs71 million, compared to losses at Rs39 million in the same time last year. Units in the South continued to contribute earnings but those were sharply reduced by 87 per cent to Rs28 million.

‘The cement sector faced a myriad of issues most notably the breakdown in pricing arrangement, leading to price reductions on the domestic front,’ says Ayub Ansari, sector analyst at Invest & Finance Securities. The study of cement sector performance included 17 companies, representing 95 per cent of the total sector market capitalisation.

The zonal analysis excluded Lucky and Dewan from the sample since both had plants in both the zones. Analysts said that breakdown in pricing arrangement represented itself in reduced gross profit. Gross profit of the cement sector declined 19.5 per cent to Rs6,917 million for the quarter under review, from Rs8,591 million in the similar period of 2009. Gross profit margin shrank by 5.24 per cent to 24.18 per cent from 29.42 per cent.

Sector Top line was down by 2 per cent to Rs28.6 billion for the quarter under review, from Rs29.2 billion in the same time last year. Analyst blamed it on lower prices, especially in the local markets where retail prices averaged Rs318 per bag, representing 1.5 per cent year-on-year decrease. Net export prices also slumped by 14-15 per cent in US dollar terms. The fall was cushioned somewhat owing to the depreciation of the rupee by 12 per cent during the period.

Domestic despatches were possibly held steady, spurred by price cuts otherwise top line would have lost greater glory. Analyst said that the sector gross margins (GMs) had contracted by 5.2 per cent, in spite of the significant 56 per cent drop in international coal prices to $71 per ton in 1QFY10.

Companies located in the Southern region represented 9.5 per cent decline in prices, compared to a bigger cut of 15.4 per cent in the North. Besides a more grueling competition in the North, for their proximity to the sea, units in the South also enjoy location benefits. That comes in respect of lower transportation costs, both in respect of imported coal and export despatches by sea.