Karachi: The building industry has already been quite affected by a large rise in steel prices; the skyrocketing cement prices are yet another factor adding to it. In the first seven months of the fiscal year 2022–2023 (July–January), cement demand significantly decreased due to a slowdown in both governmental and private sector spending.
Due to the continuous political turmoil and the limited economic space, government spending has remained low in recent months. While, due to the increased cost of building, private sector spending has also seen a significant slowdown.
Notwithstanding this, since June 2021, the price of cement has increased by 67%, to Rs 1,100-1,120 per bag.
According to Ali Asif, an analyst at Insight Securities, the increase is mostly the result of increasing raw material costs as a result of the upward trend in coal prices as well as inflationary pressure.
Moreover, starting February 16, 2023, prices will increase by Rs. 50 per bag due to recent increases in the Federal Excise Tax (FED) and sales tax on cement bags.
In light of recent price increases, it is important to note that the Association of Builders and Developers (ABAD) has already sworn off buying steel and iron bars. The state of the construction industry would worsen as a result of the increase in cement prices.
In spite of rising construction costs, increased borrowing rates, poor Public Sector Development Program (PSDP) usage, and political unpredictability, cement offtakes remained lacklustre in the first seven months of the current fiscal year, totaling 25.76 million tonnes, down 18%.
Notably, PSDP and private investments continue to be major demand generators for the construction industry. Actual PSDP spending in 7MFY23 was PKR203.1 billion compared to PKR371.8 billion in permitted spending.
PSDP had a budget of PKR727 billion allocated for the current fiscal year, but only PKR371 billion was permitted in 7MFY23, with actual spending totaling PKR203 billion.
Construction material demand remained low as a result of low PSDP spending since PSDP spending and building material demand are closely associated. This downturn is having a negative impact on the cement industry, as seen by the 18% fall in dispatches during the first seven months of FY23.
According to historical trends, offtakes are predicted to stay low for the next two months due to the Ramzan season. The launching of new capabilities has made the sector’s concerns even worse. The industry’s total capacity has increased by 11.52 MT in the FY23TD, bringing it to 84 million tonnes.
Pakistan has placed a significant amount of reliance on the private sector as its main source of products and services. However, because of the economic turmoil brought on by high inflation, increasing interest rates, the devaluation of the Pakistani Rupee (PKR), and political unpredictability, private sector spending has drastically decreased, leading to building cost overruns.
Furthermore, given how closely related the construction sector is to the steel industry, which is experiencing a lack of raw materials and import restrictions, these issues may only contribute to further reduced cement demand.
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