The grapevine has gone suspiciously quiet on the housing policy front. Only a few months ago, the Shahbaz government was actively considering recommendations of builders and developers to embark on a spending spree witha new and improved low cost housing plan. After scrapping PTI’s Naya Pakistan Housing Program (NPHP), and the associated mark-up subsidy promised to prospective home buyers, a new scheme laden with tax cuts and benefits for rich and influential developers was on nobody’s bingo card. Specially this soon. And yet, that appears to be on the agenda. For construction material manufacturers, this would spell a much-needed demand bonanza.
Take cement for instance. Though financially, manufacturers are on a path to a glorious recovery, if it were not for the persistent pricing power they enjoy, the current demand dynamics would send them hurtling backwards. The operational performance so far has been underwhelming, with domestic demand down 7 percent in 9MFY25 year on year, and down 24 percent compared to the same period in FY22 when domestic volumes reached their historic highs. The industry capacity utilization has plunged to 52 percent, lowest in many years which means a significant capacity is sitting idle. This has come after the industry went through a significant expansion cycle only recently with capacity nearly doubling since FY16. At that time, the industry was touching its maximum capacity utilization and was ready to make hefty investments to cater to an economy stepping into a massive expansion. The expansion went under.
With demand failing to keep pace with recent capacity expansions, current utilization levels are more than a cause for concern, especially if offtake continues to remain sluggish. The nearly 50 percent utilization rate is particularly striking given that market-savvy companies have made headway into cross-border and overseas export markets.In 9MFY25, exports share has reached 19 percent, from 15 percent last year and 9 percent in FY23. Despite the export momentum, the industry is not operating at optimum levels of capacity. This leads to higher production costs as the fixed costs are covered by fewer volumes deployed.
Typically, such low levels of capacity utilization would trigger a price war, with companies undercutting each other in a bid to capture greater market share. However, over the past two years, cement manufacturers have shown remarkable restraint. Rather than engaging in self-defeating price battles, they have opted for pricing discipline. Despite demand crashing and burning, prices have continued to surge.This could be collusion—or simply smart business. After all, when prices across the board are rising, particularly for complementary goods in the construction sector, it would be unwise for firms to fight amongst themselves. Especially also when broader demand dynamics—stagnant disposable incomes and weak purchasing power—are notconducive togreater offtake anyway.
As Ramadan and Eid lull recedes, offtake may grow as the year comes to an end, and last minute development spending allocations are utilized. Other factors such as policy rate cuts might play a role in pushing demand as financing becomes less expensive. Except, major improvement in the consumption of construction materials will depend heavily on this government’s growth priorities. If the focus is on short-term, flashy growth that’s high on visibility but low on long-term productivity, cement manufacturers could find themselves back in a 2021–22-style cycle sooner than expected.
