Incremental cement demand is roughly estimated at around 370,000 tons for the financial year 2022-23 and 1,900,000 tons in FY24, which translates into marginal upticks of 1 percent and 4 percent, respectively.
According to a report by Muhammad Waqas Ghani, Assistant Vice President at JS Global,
The additional demand due to floods will not be prominent in FY23 as many roads and rail links have been damaged and repair work will most likely materialize over multiple years. Near-term dispatch numbers will hence carry a distortion factor due to these logistical constraints. However, a relatively more pronounced impact could be seen in FY24.
While an uptick in the coming months is likely due to private housing construction and the end of the monsoon, the report takes a cue from the 2010 floods to estimate the quantum and timing of broad-based reconstruction demand, added the report.
The report stated that, in the 2010 floods, 1,700,000 homes were affected and the early recovery effort concentrated on 827,000 fully destroyed homes. A total of US$636 million in funds was the need assessment at the time. After one year, 351,980 homes and shelters had been built where most of them were one-room or temporary shelters and not made from cement as a major constituent.
According to International Organization for Migration (a UN agency), 10 percent of all the residences rebuilt were flood-resistant. The majority of the remaining 90 percent were rebuilt in simple shelters using supplies or techniques that nevertheless made them extremely vulnerable to future flooding.
“By utilizing traditional architecture, mud, clay, and lime-based construction instead of burnt bricks and cement, it was also possible to reduce the cost of these homes. According to ADB’s assessment of the 2010 floods, 40 percent of the houses in the affected areas were ‘pucca’ (fully built) but only 3 percent of the total ‘pucca’ housing stock had suffered damages,” it added.
“This makes sense, as in general, pucca houses perform better when affected by standing water, though are still vulnerable to flash flooding which impacts the foundations. For ‘Katcha’ (mud houses, for example) constructions, however, the impact has often been extreme and irreversible,” said the report.
The government will likely not go for the rebuilding of all the houses lost as most of the lost homes weren’t conventionally built with cement and bricks, to begin with. The latest estimates by the National Disaster Management Authority (NDMA) suggest that 581,000 houses have been fully damaged.
Assuming 233,000 houses (40 percent of 581,500 fully destroyed homes impacted as per data available to date) of an average size of 80 sq. yards, the report forecasts additional demand of 2,200,000 tons at most, stated the report.
But since the government is in the process of compiling damage estimates at the moment, it will take a few months until any progress can be seen on the rehabilitation of housing in affected areas. It is likely that Pakistan may see only ~370,000 tons of additional demand in 2HFY23 due to the reconstruction, it added.
The impact of the remaining ~1,900,000 tons is likely to be witnessed in FY24 although that also remains debatable as reconstruction was done over a number of years post-2010 floods. Assuming a cement bag price of Rs. 1,020/bag, for 233,000 houses, there will be a funding requirement of Rs. 45 billion (US$ 191 million at a PKR/US$ 238) putting pressure on the already constricted fiscal space. The government is expected to fund the rehabilitation process through PSDP allocations and foreign aid.
Given exact data is still rolling in, the sensitivity of cement demand at varying levels of housing construction shows that every 100,000 houses being built will create a demand of 960,000 tons of cement. The report suggests no upside from flood reconstruction as the economy awaits clarity on both timing and donor inflows to fund the reconstruction activities. As and when this materializes, the sector could see a demand upside.
2MFY23 Cement Dispatches Remain Substantially Impacted
Lackluster demand for cement has been witnessed during the first two months of the ongoing fiscal year owing to heavy rains and flood-related damages. The abnormal rainy season and floods might prolong the current sluggish scenario and will likely put pressure on the pricing power of cement manufacturers, strengthening the report’s -10 percent YoY base case assumption for FY23.
Dispatches in the last few days, as per JS Global, have however picked up, Sensitivity of incremental cement demand for rehabilitation of houses is a positive sign. Cumulative dispatches for 2MFY23 clocked in at 5,300,000 tons, depicting a decline of 36 percent YoY due to a slowdown in construction activities.
In the aftermath of flash floods a decade ago (FY11), local cement dispatches saw a 7 percent decline during that year. The primary agricultural infrastructure of farmers like tube-wells, storage, seed stocks/fertilizer inventory, and various agricultural machinery and equipment have faced damage. These losses would result in reduced farmer incomes.
Note that farmer incomes have historically been seen as one of the drivers of domestic cement sales.