Why cement and steel industries parted their profitability ways

Infograph: TBS

Since the economy's reopening in mid-2020, the intact pace of construction helped both the cement and steel mills more than recover their lost sales and profits during the first wave of the pandemic.

But, in the last five to six months, the two major construction material industries are witnessing a different profitability situation, reflected in the publicly listed firms' disclosures.

In fiscal 2020-21, except Meghna Cement, all the listed cement and MS rod mills posted a significant annual profit growth.

The growth was not only from the dented base of the previous year, rather they all outgrew their pre-pandemic sales and profits.

But, in the July-September quarter, their business reality diverged.

Of the seven listed cement mills, only LafargeHolcim and MI Cement managed to decently grow their quarterly profits in July-September, compared to the same period of 2020.

Multinational HeidelbergCement posted fourfold year-on-year losses in the July-September quarter. Premier Cement's quarterly profits dropped 85% year-on-year.

Both the companies blamed their cost escalation for the earnings deterioration.

Meanwhile, GPH Ispat, BSRM Limited and BSRM Steels, SS Steel, the listed steelmakers, which continued production to cater to the boosting demand for MS rods despite a skyrocketing price, posted 80%-430% annual profit growth as in the previous year, they suffered 30%-65% drops in profit.

The publicly listed steelmakers' latest annual profits also are 30%-141% higher than that in the pre-pandemic year.

And, their July-September profits also registered 55-205% year-on-year growth.

Why the difference in earnings scenario

"The difference in profitability, especially in the last five months, was made by the relevant industries' power to increase the price to offset the spiking costs," said Metrocem Steel and Metrocem Cement's Managing Director Md Shaidullah, who is also co-leading both the country's cement and steel industry associations.

He said amid increasing production and sales, both the cement and steel industries are fighting with escalating costs that rose 60%-70% or even more in the last 12 months.

Installed overcapacity in the cement industry is resulting in a topline war among companies that hinders cement price increases.

In 2020, the cement industry utilised 3.8 crore tonnes out of its around 8 crore tonnes of installed capacity then, according to Shahidullah, the vice-president of the Bangladesh Cement Manufacturers Association.

Amid the giants' continuous investments for their full preparation to cater to the future demand, the annual capacity has increased to around 9 crore tonnes now. 

Shahidullah forecasts the utilisation might be little more than 4 crore tonnes in 2021.

"This is why the cement companies are struggling to increase the price to cope up with the increasing costs," he said.

According to him, now clinker and other raw materials are much more expensive at international sources, freight which accounts for over half of the raw material cost up to the mill gates also skyrocketed to increase the total cost of raw material by at least 60% in a year.

Local transportation costs also increased 15% following the recent jump in diesel price.

On the other hand, cement prices have at best increased by 30% in the last 12 months, while some large companies are still aggressively pricing to maintain their topline.

Capital intensive cement industry needs at least 60% capacity utilisation for the needed profit margins to sustain, which is at 45% now.

The worst news is, the cement industry's average gross profit margin shrunk to below 15% now, which was at a level of 25% historically.

If the situation continues, many companies would face losses in the coming days, Shahidullah said, adding that some non-listed cement makers are already losing money in the recent months.

Steelmakers enjoy demand-supply balance  

Shahidullah, also the secretary general of Bangladesh Steel Manufacturers Association, said as there is no overcapacity problem in the steel industry, steel mills on average are running at full swing to utilise up to 80% of their production capacity.

Like the rest of the world, the industry is adjusting its prices with the alarmingly escalating costs of raw materials and he cannot expect an immediate slowdown.

"The world seems to have already become accustomed to the increased steel price," he said.

To explain the raw material market, he said, the post-first-wave world is chasing economic growth and infrastructure building is an epicentre of the plan.

The USA, a large exporter of melting scrap, is working on its $1.2 trillion infrastructure spending plan which is discouraging exports of the MS rod mills' major raw material.

Nowadays, China itself is importing raw materials a lot, a U-turn from their previous status of steel raw material exporter.

Post-Brexit Europe too is exporting less and consuming more.

The global automobile industry is manufacturing less and their by-products which are used as raw material for scrap melting is less abundant nowadays.

Also, coal, fuel and power price hikes are increasing the melting costs too.

International scrap prices shot to $580-$600 from $300-$320 per tonne a year ago, while the price of Silico Manganese, another important raw material for steel mills, doubled to $1,600 per tonne in a year.

Freight increased by around 60% in a year.  

Steel companies are working hard to minimise their procurement costs. 

However, steel mills are still able to maintain their 12-15% gross profit margin as the increased cost is almost transferred to the customers, said Shahidullah.

"Still, it does not sound good for the industry," he said, adding because at some point of price hike there remains a risk of slowdown.

"Already a number of my MS rod buyers halted their procurement as their budget exceeded." 

Call for the government's understanding

Like any other business, the steelmakers cannot help their customers, as well as the economy at the expense of their shareholders, Shahidullah said.

Growth-hungry countries, including neighbouring India, have already slashed duties on scrap steel to let their economy afford the key construction material.

Echoing his industry colleagues, Shahidullah urges the government to understand the situation and cut the high duties and taxes on steel and cement industries.

The government also should make the advance income tax adjustable as it is collecting income tax in advance from raw material importers regardless of whether they make a profit ultimately.

The peer countries at best charge 5% duties on raw and intermediary construction materials, while Bangladeshi cement companies are paying a double-digit customs duty on clinker imports.