The cement industry in Punjab is bracing for a significant price hike as the provincial government increases royalty rates on raw materials to 6% of the ex-factory sale price of cement or clinker.
According to a recent notification from the Punjab Mines & Mineral Department, these new royalty rates are effective from July 1, 2024. This change is expected to drive up the cost of cement production, which will likely be passed on to consumers in the form of higher retail prices.
Impact on Cement Prices
Topline Securities, a leading brokerage firm, has estimated an incremental price impact of Rs. 50 per bag due to the new royalty rates. Prior to this notification, the royalty was Rs. 20 per bag, which will now rise to Rs. 70 per bag for cement manufacturers in Punjab. This increase will likely lead to higher retail prices for cement.
The brokerage firm also noted that the price disparity between different provinces may widen due to this change. The provincial governments of Punjab and Khyber Pakhtunkhwa had already increased the royalty on limestone from Rs. 120 per ton to Rs. 250 per ton in the FY25 budget. However, the new 6% ex-factory price notification is expected to override the previous Rs. 250 per ton rate.
Federal Excise Duty and Cement Prices
In addition to the provincial royalty increase, the federal government has raised the federal excise duty on cement by Rs. 100 per bag in the FY25 budget. Consequently, cement bag prices have already surged by approximately 15% month-on-month (MoM) in July 2024, reaching around Rs. 1,500 per bag in the North, as per data from the Pakistan Bureau of Statistics (PBS).
Further Price Increases Expected
Topline Securities predicts that Punjab-based cement manufacturers will further increase their prices by Rs. 30-50 per bag to offset the impact of the new royalty rates. However, these companies are currently consulting their legal teams and may challenge the decision in court.
Companies Affected
The All Pakistan Cement Manufacturers Association (APCMA) reports that about 48% of the installed cement production capacity in the North is located in Punjab. The companies most affected by the new royalty rates include Bestway Cement (BWCL), Dandot Cement (DNCC), Dewan Cement (DCL), DG Khan Cement (DGKC), Fauji Cement (FCCL), Fecto Cement (FECTC), Flying Cement (FLYNG), Gharibwal Cement (GWLC), and Maple Leaf Cement (MLCF).
Among these, MLCF, FCCL, and DGKC have significant operations in Punjab, with 100%, 48%, and 50% of their North capacity based in the province, respectively. In June 2024, FCCL, DGKC, and MLCF generated 53%, 35%, and 100% of their total domestic dispatches from Punjab-based plants.
Conclusion
This development is seen as neutral to negative for Punjab-based cement manufacturers, as increased production costs may lead to a diversion of volumes to other provinces. The full impact of the new royalty rates will unfold as companies navigate these changes and potentially seek legal recourse.
