Cement industry suffers as profitability keeps squeezing

Unlike the steel industry, cement manufacturers are failing to increase the price of their products in line with the escalated costs of raw materials and transportation owing to stiff competition.

Following a robust business growth in the 2020-21 fiscal year, most of the publicly-listed cement makers are posting drastic declines in their profits since the middle of 2021.

In a year up to last December, the industry's gross profit margin – the ratio between price and production costs – squeezed to single-digit from 14-15% earlier, revealed the quarterly financial statements of the majority listed cement manufacturers including MI Cement Factory and Premier Cement.

Before the onset of the pandemic, the cement industry had been growing at a double-digit rate amid some profitability crisis, according to Md Shahidullah, vice-president of the Bangladesh Cement Manufacturers Association (BCMA).

"Cement sales were going up and down since the first wave of the Covid-19 in March 2020 and those were manageable ultimately. But I cannot recall such a narrow factory level profit margin, at least in the last decade," he added.

In 2021, cement's main raw material clinker's price went up dramatically in the international market amid the post-first wave global construction boom and the coal price hike that further added to clinker production costs. Also, the maritime freight skyrocketed, and at the end of the year, the local fuel price hike further added to the local industry costs.

Against the roughly 40% production cost hike over a year, the local cement industry ended 2021 with a near or mere double-digit price increase, the industry leader kept saying on Monday.

Initially, in the first half of 2021, many cement makers had managed to increase prices up to 20%-25% in line with the then cost escalation, and many companies posted robust growth in their turnover and profits up to June.

But it did not sustain, despite the fact that the cost of production still kept rising.

It was only because of the stiff competition in the cement industry which has a high installed capacity while the annual cement consumption has not surpassed the volume of 2019 so far, said Md Shahidullah who is the managing director of Metrocem Cement and Metrocem Steel.

Cement industry veteran Masud Khan, adviser to the country's cement export pioneer MI Cement Factory, said, in the first half of 2021, the industry registered a one-third growth, compared to the previous year's dented base when more than two months were lost into the nationwide shutdown.

The industry went almost flat in the second half of 2021 amid the price war on top of the consumption slowdown.

In 2021, the cement industry registered a 17% annual volume growth, according to Masud.

Megaprojects are not boosting cement sales like that in the previous few years as many are at their final stages. Both the individual and corporate home builders were consuming enough, but the steel price hike slowed down many of their construction, especially in the latter part of 2021, said Shahidullah.

Unlike cement, construction rod prices rose to around Tk80,000 per tonne from around Tk60,000 a year ago, which is good enough to offset the steel industry's raw material cost hikes.

Steel mills' good days are being reflected in both the topline and bottom-line growth of the leading steelmakers listed on stock exchanges such as BSRM, GPH Ispat. 

The steel industry is enjoying the prevailing balance between installed capacity and demand, said Shahidullah, who is also the secretary general of the Bangladesh Steel Manufacturers Association.

At least half of the 30 cement mills, Shahidullah is aware of, are making losses in the recent months.

Securing around Tk6 in earnings per share (EPS) for the financial year that ended last June, two listed cement makers MI Cement and Premier Cement Mills posted a meagre quarterly EPS of Tk0.21 and Tk0.11 in the October-December quarter.

Meghna Cement posted a slight quarterly growth in its cement business and EPS.

Of the multinational cement makers, LafargeHolcim's earnings grew significantly in 2021, which analysts believe was mostly due to its robust profit from the disputed aggregate business that began in January last year.

After posting over Tk11 in annual EPS in 2020, HeidelbergCement Bangladesh nosedived into losses again.

"We have been urging the government to reduce the excessive burden of duties and taxes including the advance income tax and value-added tax," he said.

Otherwise, government revenue from the cement industry will increase at the expense of the mills' profitability and also will be based on the mere import value escalation, he added.