KARACHI, June 21: Cement producers have been able to raise production quota for the fifth time in forty days since the revival of cartel on May 8.

At the meeting of the 23-member strong All Pakistan Cement Manufacturers’ Association in Lahore last week, the production quota was increased to 72 per cent, which translated into 12.3 million tons output on annualized basis.

The chairman of the Association, who commands the authority to increase quotas, has raised it from 55 to 58 to 63 to 68 to 72, and, for some mills, even to 75 per cent. If that signifies that the demand for cement is picking up, it bodes well for the industry, where until recently nearly 8 million tons of the 18 million tons of total industry capacity was sitting idle.

Cement manufacturers are also understood to have passed on to the consumers, the benefit of 25 per cent cut in Central Excise Duty (CED) decreed in the recent budget. Industry sources say that the per bag impact of 25 per cent reduction in CED works out to Rs14.30. But on average, cement still costs the consumer Rs225-235 per bag.

Critics point out that for the consumer the benefit of lower CED has been wiped out by the re-birth of the cartel, which has seen a meteoric rise in cement prices (or ‘recovery’ as the industry stalwarts prefer to call it) by Rs50 per bag, from Rs165-175 earlier in the year—when the cartel lay broken in pieces, on the sidewalk.

Consumers look up at the cement cartel with disdain. They see little sense in flare up in cement prices, after the industry began switching production from furnace oil to low cost coal.

But manufacturers beg to differ: “Cement companies have the right to use the advantage of conversion to coal to reduce their own losses and they need not be pushed on to pass that benefit also to the users,” says the finance director of the cement company that led the pack in total conversion to coal.

If there has been one sector that has been fed with the spoon of gold in the recent budget, it is the housing and construction industry. Government claims that breathing life into the construction industry is the best way to generate jobs as it would give fillip to scores of ancillary industries.

Cement sector analyst at InvestCap, Adbul Rasheed says: “The industry has already been able to sell 10.8 million tons of cement (including exports) till mid-June 2003 with full year likely to close at 11.3 million tons.” He assumes increasing demand to be emanating from government sponsored projects such as Northern bypass, Gwadar Port and Lyari Expressway.

But every company is not likely to be able to make hay while the sun shines. Most market players agree that users are choosy and demand depended on brand popularity. That could mean that all manufacturers were not likely to be able to operate plants at the currently cartel permitted three-fourths of capacity. And if they were to do so, they would be faced with huge stock pile of cement bags. In order to avoid fuss and a new threat to the cartel, such producers were understood to have been allowed margin of two months on accumulated stocks.

But analysts believe it would be several months before it can be determined whether the high level of industry production is sustainable. A senior official of a cement company that has been luckier than others in many ways, does not think there has been a major shift in demand: “Demand always picks up pace in June and July, due to long summer hours when construction activity is at its peak,” he says, adding that builders also speed up their activity in these months ahead of the monsoon season.

Wajahat Ali, head of research at Taurus Securities expects the industry to come up with dismal financial results for FY03 on the back of price war that raged for most part of the year. “But high prices, gradually growing demand, conversion to coal means that FY04 should show improved earnings for the cement sector,” he says.

Investors in cement stocks would be happy to see companies post improved profitability and distribute dividends. Fewer than nine companies had announced payouts for shareholders during financial year 2002. Two months from now only one-half of the 22 scrips listed on the cement sector had been quoting at modest premiums, but the stock prices have been rising in the recent weeks. Some analysts do not see such jump to be justified. “Much of the current rally in cement shares is speculative and premature,” says Wajahat Ali, adding that in his view, the sector was overvalued: “Share prices have risen well beyond what can be justified by any budgetary incentives or earnings growth expectations,” cautions this stock strategist.