New Cement Royalty Fee in Punjab: Which PSX Stocks Benefit Most?

Cement industry in Pakistan is broadly bifurcated into Northern and Southern zones, with former contributing approximately 80% to the industry’s annual production capacity.
Manufacturers across these zones differ in terms of their operational dynamics and accordingly charge different prices. This is amid various factors such as raw material and transportation costs, distribution channels, energy sources, and local market conditions.
Availability and procurement of raw materials, including limestone and clay, are at the core of such operational differences amongst zonal players

Regional price competition in northern zone

Northern bloc predominantly encompasses regions of Khyber Pakhtunkhwa (KPK) and Punjab.
As per latest data from All Pakistan Cement Manufacturers Association, annual production capacity for Punjab-based plants stands at 35.4 million tons, compared to 30.7 million tons for counterparts in KPK.
Companies in both regions have engaged in intense price competition over the years. Lower cost basis for KPK manufacturers allows them to penetrate into major urban centers in Punjab, including Rawalpindi and Lahore, forcing the market share of some of the local players to wear away.

Royalty fee on raw material

One of the key components of raw material cost for Cement companies is the royalty fee charged on limestone and argillaceous clay, Under the Mines Act.
Previously, provincial governments in both Punjab and KPK were charging standard rates of PKR 250/ton i.e. PKR 12.5/bag. However, both governments had been considering proposals to revise these royalty structures.
Revision by KPK government is still in line with the fixed rate structure, and has been increased by PKR 100/ton to PKR 350/ton.
For Punjab on the other hand, Lahore High Court recently announced a verdict on royalty rates, enforcing a shift away from fixed rate mechanism and linking the royalty fee to ex-factory price.

Revision in royalty fee structures

Revision imposed in Punjab leads to a royalty fee charge for manufacturers ranging from PKR 1,300 to PKR 1,400/ton, reflecting an increase of more than PKR 1,100 from previous rates. This would force companies to pass on costs to consumers, by raising the existing price range of PKR 1,315 – PKR 1,475 per 50kg bag.
Eventual outcome of this saga is dependent on pending hearings at Supreme Court of Pakistan, that presently has offered temporary relief by granting a stay order to Cement companies in Punjab.

Opportunity for KPK manufacturers

Revision of royalty rates in Punjab puts local producers at a massive disadvantage by making further room for KPK manufacturers to capture more market share in the region.
As per estimates, a change from fixed rate to a value-based structure in Punjab, favors companies operating plants within the KPK region. They can curtail prices by additional PKR 25-30 per bag, that would further intensify the regional price competition.
This would help improve margins by several hundred basis points on quarterly basis, at the expense of Punjab-based plants.
For investors, there is an event-based opportunity to capitalize on upside for companies in KPK. Key picks are Bestway Cement (BWCL), Kohat Cement (KOHC), Lucky Cement (LUCK) and Cherat Cement (CHCC).

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⚠️ This post reflects the author’s personal opinion and is for informational purposes only. It does not constitute financial advice. Investing involves risk and should be done independently. Read full disclaimer →

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