Reply To: Construction Materials discussion

Mohsin Munir

Construction costs up
Business Recorder RESEARCH APR 5TH, 2018

With a backlog of at least 12 million houses across the country, the demand for housing is on a consistent incline, and some estimates suggest, every year this shortage expands by 100,000 houses. Among other reasons, property price hikes and continually rising building and material costs have exacerbated this gap. And there doesn’t seem to be any slow-down either. Several domestic and international factors are coming into play in the cement and steel industries that will inflate construction prices going forward.

Let’s look at cement. The commodity is one of the flourishing industries in the country growing on the back of CPEC and infrastructure related development across the country. The sector’s LSM growth in 7MFY18 was 10 percent year on year while its domestic sales were up by 19 percent in 8MFY18. Despite falling exports, the sector reached 91 percent capacity utilization during the period and in some months, reached 99 percent utilization.

Earlier this year, cement prices had started to slide down particularly in the north because of Cherat Cement’s expansion, but they have started to revive back strongly now. In fact, the industry raised the prices by Rs10 per 50-kg bag in February, promising to follow up with additional price increases. Since, cement prices have climbed by Rs60 per bag. (Read “Cement’s recovering confidence”, March 8, 2018).

According to Pakistan Bureau of Statistics (PBS), the average price of a cement bag end of March was Rs543; against Rs548 this time last year. After the latest hike, this average may have gone further up. But more importantly, prices could continue to move in that direction.

As a rule, anything that is imported as finished product or is an input in manufacturing will be more expensive given the rupee devaluation. The rupee depreciation of 9 percent against dollar has automatically increased import costs. The cement sector imports coal as a major raw material that has itself seen a price hike globally. Together with the weakening rupee, the higher costs had to be passed onto the consumer, given that the industry is confident it won’t lose its market if it did. After all, there is no chance of the sector entering overcapacity stage since demand is growing, capacity utilization is at its optimum levels already and most of the expansions in the north have been temporarily put to a halt by order of the Supreme Court.

Another big contributor in building costs is steel. The local industry had been heavily lobbying for protection from imports for years. The industry filed an application with the National Tariff Commission (NTC) that finally came up with five-year anti-dumping levies on galvanized coils and cold rolled products last year, which was a win against Chinese dumping of cheap steel into the country.

However, the existing regulatory duty of 15 percent on all other steel imports from all other countries was also raised to 30 percent.

This essentially has allowed steel production to take off and steel prices to be comfortably stacked up by local players. In fact, Elixir Securities told in a note that Amreli Steel had raised steel bar prices by Rs3000 per ton to Rs98,000 per ton end of March. Per PBS, steel bar prices have gone up by 10 percent between March of this year and last. Subsequent price hikes are expected.

Meanwhile, imported steel could become even more expensive. With China expected to cut down production of steel by 20 percent over the next few years, demand may outpace supply leading to steel prices climbing globally. On the other hand, Trump’s latest steel tariffs which essentially closed the US market for steel importing business may lead to a supply glut across the rest of the world.

Some are fearing trade diversion which could pressure prices as well. Though here at home, measures like RDs are taken at a whim. Any major influx of cheaper steel into the country may result in an increase in that levy while remedial measures with the NTC can also be taken up, which are helpful if not expedient. Local players don’t seem very worried.

Copyright Business Recorder, 2018