The last few years have not been kind to the cement industry. The sector has been impacted by a triple whammy in terms of capacity expansion, lower demand and rising interest rates. During the early 2010s, the sector was seeing high demand which saw the industry operating near capacity. Seeing the trend going forward, many of the companies looked to expand their production facility in order to capitalize on the rising demand.
From 2015 to 2020, there was a rush to expand and increase production capacity. Once the pandemic struck, the demand plummeted and by the time the new production facilities came online, the demand had started to taper off. In addition to reduced demand, the companies started to face rising finance costs which were applicable on the funding they had borrowed in order to fund the expansions. The aftermath of this was that the whole sector started to see falling demand and rising costs which started to eat into its profit margins. Now it seems that some of the investors in the industry are having second thoughts.
Pharaon Investment Group Limited is a Lebanese holding company that has investments in Attock Petroleum, Attock Oil Company, Attock Refinery and Attock Cement Pakistan Limited just to name a few. The holding company recently announced that it was re-evaluating its long-term strategic options in the country. One of the options being considered is a potential sale of Attock Cement in which it has a holding of 84%. The sale can be seen in a series of events that have taken place around Attock Cement in the recent past.
Attock Cement was one of the companies which carried out an expansion of around $120 million in the 2010s which would have increased capacity by 1.1 million tonnes and came online in 2019. Before this expansion, the company had a capacity of around 2.3 million tonnes which increased to around 3.3 million tonnes. Before the expansion, Attock was operating at 110% capacity. The latest two years have shown that the actual production has fallen to around 32% of the installed capacity as the demand has fallen. Local sales have been impacted by rising costs and prices while lack of construction activity has seen decreased local despatches. Some of the decrease has been covered by an increase in exports being carried out, however, the demand is still a shadow of where it was a few years ago.
Attock still saw one of its best years in recent history in terms of revenues as it recorded turnover of Rs 29 billion in 2024 compared to Rs 25 billion in 2023. The cement sector is one of the top sectors in terms of gross profit margin earned where an average of more than 30% is earned in normal circumstances. As demand has fallen, this is one area that has been affected as even Attock has seen its gross margins fall from around 40% in 2017 to 18% in 2024.
As gross margins have fallen, the company has also seen its operating margin go from 12.4% in 2023 to almost half in 2024 to clock in at around 7%. The net profit margin of the company has improved from 5% in 2023 to 12.5% in 2024, however, much of this gain was due to the sale of its subsidiary called Saqr Al Keetan Cement company based in Iraq. Attock realized a gain of Rs 4.29 billion from the sale. If that gain is taken out, the net margin would have been negative, registering at around -2.53% compared to 6% a year ago.
The divestment of Attock in Saqr and now the possible divestment of Pharaon in Attock points towards the fact that there is an interest to sell cement-related interest in the board rooms of both companies. Considering the point at which both the companies are operating, there is a feeling that the profits are slowly evaporating and this is a good opportunity to divest before losses become a part and parcel. Attock has enjoyed a net profit margin as high as 27% during its best times, however, the margins have fallen to only 5% in 2023. If the gain from the sale of the subsidiary is taken out, the company actually made a loss and showed negative net margin in 2024. The sale being considered by Pharaon highlights that things might be getting worse in the coming months.
More evidence that can be seen in this regard is the fact that the demand and production of the company seem to be falling still. The first quarter results in 2025 show that demand and production has kept falling. Last year, the sales were around 346 thousand tonnes which have fallen to 309 thousand tonnes. In order to match sales, the company decreased its production. It was operating at around 40% which decreased to 29% in the latest quarter. As sales fell, the company earned lower revenues. The gross margin was similar at around 17% while operating margin fell from 5.84% to 3% this quarter.
Last year, the company earned a net margin of 23% which has fallen to only 1% this quarter. Last year, the company booked a gain of Rs 2 billion from its sale of a subsidiary. If the gain was taken out, the company would have shown an operating margin of -9.8%. Even though the net margin is better than last year, it is still a far cry from 5% which was the average for the company considering its history.
Based on this analysis, it can be seen that the cement sector is still seeing lower sales going forward. With demand falling, the best option for cement manufacturers is to look to export its excess production in order to raise its revenues. In terms of costs, companies like Attock are still feeling the pinch from the interest rates as latest accounts show that the company saw interest expense as 2% of sales which is a burden on its profitability. Seeing the future prospects, there is a feeling that this is the best things can get for some time and in order to maximise their return, companies are looking to divest before the situation gets worse.
