The Government of Punjab has announced an increase in the royalty rate on limestone, crucial for cement manufacturing.
The revised rate now stands at 6% of the ex-factory sales price of cement or clinker, up from the previous fixed rate of PKR 250 per ton.
Under this new royalty structure, the cost of limestone per bag of cement is projected to rise to PKR 55, up from the current PKR 19 per bag. As a result, regional cement prices are expected to increase from PKR 1,510 per bag to approximately PKR 1,560 per bag.
As per research by AKD Securities, the potential impacts could be as follows:
- Cost Pass-Through: Cement manufacturers in Punjab are anticipated to pass these increased costs onto consumers, leading to higher regional cement prices. Companies outside Punjab may benefit if they do not face similar cost increases and can maintain competitive pricing.
- Regional Price Adjustments: Should companies in other regions also raise their prices in response to the increase in Punjab, they could capitalize on the price hikes and potentially see improved financial performance, as illustrated in Case 1 of the accompanying table.
- Earnings Impact: If companies in Punjab are unable to pass on these cost pressures effectively, they may experience a negative impact on their earnings per share (EPS). This scenario, as outlined in Case 2 of the table, could result in a significant decline in profitability, though it is considered less likely given the expected industry response.
The revised royalty rate reflects the Government of Punjab’s strategy to increase revenue from the mining sector, but it introduces new cost pressures for cement producers.
