In contrast to the silver spoon that was handed by the previous government to the construction sector, the current economic and political environment offer only bad news. As the dream of building 5 million houses and a subsidy to boost affordablility came to an unceremonious end, the biggest factor for demand slowdown have been construction costs.
Prices for construction materials have baloonned over the past two years, mainly because of rising costs of raw materials (such as coal, fuel/power and steel scrap) and the associated expenses to import these inputs from abroad. Invariably, when the currency depreciates, the cost of imports mounts significantly impacting overall cost of inputs. Over the past year, cement prices have surged by 47 percent (according to the Pakistan Bureau of Statistics’ monthly wholesale price index). In the north zone, where demand is higher and there are more players operating their respective capacities, prices increased nearly 48 percent while prices in the south grew about 43 percent; lower than north zone prices. It wasn’t long ago that prices in the south were higher than those in the north but the script has flipped very fast. Even though, most cement manufacturers quickly switched to cheaper domestically sourced coal or the coal variety imported from Afghanistan, demand remained low (in FY22, total offtake dropped 8%).
And yet, revenues industry wide during the year grew 39 percent which is phenomenoal. Evidently, much of the impact of cost-push inflation was passed onto consumers that allowed margins for the industry to improve from 24 percent to 25 percent. This was entirely a function of improved rentetion prices. Cement prices are trailing their historic highs, crossing Rs1000 per bag, though since Sep-22, they have begun to show sign of weakness. It is worth noting that during the span of only a year (Oct-21 to Oct-22) when cement prices nearly doubled, steel prices grew 22 percent while WPI grew 39 percent, lower than cement.
Though prices are easing now, it remains to seem what direction they would head in during the coming months. Demand has continued to remain dull in the first four months of the fiscal year, dropping 23 percent during the period compared to the same last year where local sales dropped 22 percent. Builders suggest demand may not be reviving any time soon, while reduction in development spending and rising interest rates are not conducive to improve either public or private-sector demand in construction. Having to say a premature goodbye to the mark-up subsidy that was introduced by the SBP under the PTI regime, home buyers are likely not looking to build a new home or spend heavily on construction when costs are so high. Some believe flood related infrastructure development may spur new demand into the industry, it is hard to say how soon that spending will materialize.
