Unstable coal prices to squeeze cement margins: CFO DGKC

January 21, 2022 (MLN): Though coal prices tamed down from the peak but still moving on an unstable ground which will expose cement manufacturers to witness squeezed margins and negative volumetric growth in months to come, Inayat Ullah Niazi, Chief Financial Officer (CFO), D.G. Khan Cement Company Limited (DGKC) told Mettis Global on Friday.

The sudden spike in demand for coal as a result of the rebound in economic activities after a terrible slowdown due to Covid-19 lockdowns across the globe disrupted the supply chain that ultimately pushed local manufacturers into the troubled zone, he added.

He said that companies cannot pass on the entire impact of rising coal prices (currently standing at $159/ton) to the end consumers and cherry on the top the increasing interest rate is also playing its due role to hurt the companies’ financials. In 2021, the State Bank of Pakistan (SBP) has raised interest rates by 275bps to 9.75% compared to the previous year.

However, the buoyant cement demand can come to a rescue on the back of housing schemes, dams construction, and road infrastructure especially during the phase of the upcoming election campaign.

Speaking about DGKC, he stated that the company receive a strong dividend income of around Rs2 billion which helps the company to carry out its operations smoothly.

Upon asking a question pertaining highly levered state with a debt to asset ratio of 35%, he stated that the company has already paid off Rs3 – 4 billion debt and constantly planning to subdue its impact.

“To pay off the debt, the companies need to have decent cash flows and for this margin should be strong but under the present scenario, it has become difficult for cement players to keep the margins intact,”  Saad Hanif, Senior Investment Analyst at Insight Securities said while speaking to Mettis Global.

They have to face the brunt of rising interest rates and the rising input prices particularly coal which has left no room to rectify the margins. Eventually, the valuation of the company will be suffered, he added.

On the demand side, he said that domestic demand will likely reach 52mn tons by FY23, translating into 8.4% growth from FY21. While local dispatches are likely to grow by 5% by FY23.

During the last 20 years, Pakistan’s local cement dispatches have grown at a CAGR of 8.2%, while dispatch growth during the years of higher GDP growth is above 12%.

Going forward, cement players may face a hit of a slowdown in economic activity, increase in energy prices, weak external account position, price competition amongst players, and change in the regulatory environment.

All in all, the cement sector is in the doldrums as the players continue to face currency devaluation, increase in electricity tariffs, coal cost as well as high taxation. The cement industry does not get any subsidy from the government and in fact, it contributes to the national exchequer through exports, the spokesperson of All Pakistan Cement Manufacturers Association (APCMA) highlighted.

The government must provide a level playing field through addressing the above-stated issues so that Industry may optimally utilize its potential, he noted.

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