Construction material industry faces meltdown as sales plunge
Entrepreneurs fear turnaround unlikely before mid-2025
Already hit by tighter state investment, real estate inflation, and sluggish industrialisation since the Ukraine War, the country's construction material industries were dealt a severe blow in the just concluded fiscal year with an even faster slump in consumption of key materials.
The steadily rising volume curve of construction rods bent down in 2023-24 fiscal year as the rate of decline quadrupled while mega projects and large building constructions tapered off.
Cement sales continued in its third straight year of lower sales, while tiles, fittings and paints consumption followed the trend over the last two years, raising industry concern about capacity utilisation, essential for achieving economies of scale.
According to the Bangladesh Steel Manufacturers Association (BSMA), construction rod consumption in the country fell by nearly 4% in FY23 after hitting an all-time high of 65 lakh tonnes in FY22 amid a post pandemic hike.
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The rate of decline more than quadrupled in the past fiscal year ending in June as national consumption fell to around 52 lakh tonnes to post a 17% drop year on year.
"We never expected the industry's sales to come down below 55 lakh tonnes again," said Metrocem Ispat Managing Director Md Shahidullah who is a vice president of the BSMA.
Government projects, which previously accounted for nearly half of the steel and nearly 40% of the cement used a few years ago, have now dwindled to 20%-25% due to tightening of the development budget.
"Government projects, which previously accounted for nearly half of the steel and nearly 40% of the cement used a few years ago, have now dwindled to 20%-25% due to tightening of the development budget," he told TBS explaining the slowdown.
The government's annual development programme (ADP) implementation rate fell to a four year low of 57.54% of the revised allocation in the first 11 months of the past fiscal year and the development spending was almost flat at Tk1.46 lakh crore.
Building material sales to the housing sector, too, fell significantly, Shahidullah added.
Housing construction slowest in 4 years
Real estate developers, another major buyer of construction materials, went conservative in building new infrastructures as material prices shot too high—up to 85% since pandemic, which pushed apartment prices almost beyond the reach of the middle class, said Mohammed Akter Biswas, vice president of Real Estate and Housing Association of Bangladesh (REHAB).
Apartment prices have more than doubled in the past four-five years to compensate for the higher cost of land and materials.
"Due to the slower pace of clearing ready apartments, realtors' construction is at its slowest pace in the past four years," he said, adding that around 5,000 ready apartments were unsold in the capital while some 10,000 were in the pipeline to be up for sale in the coming days.
Due to the slower pace of clearing ready apartments, realtors' construction is at its slowest pace in the past four years. Around 5,000 ready apartments were unsold in the capital while some 10,000 were in the pipeline to be up for sale in the coming days.
Builders are uncertain about the profitability of new projects that require much more capital nowadays, he said, adding, "A company has to pay more interest the longer it takes to sell out apartments."
The spiked up interest rates against bank loans — to 14%-16.5% currently from 8%-9% two years back — is hurting all businesses, said Md Selim Reza, chief financial officer of Premier Cement Mills, one of top-three cement manufacturers in the country.
Dollar price surged to around Tk118 from around Tk85 in the first quarter of 2022 and all the import costs in local currency terms surged accordingly, he added.
Cement fell off cemented growth track
The decade-long 8% plus compound annual growth of demand for cement, the most consumed construction material, had reversed in FY22 and the slump continued for the third straight year.
Sales data compiled by the Bangladesh Cement Manufacturers Association (BCMA) suggest annual demand for cement peaked to nearly four crore tonnes in 2021 from 1.5 crore tonnes in 2011 and fell to around 3.8 crore tonnes in FY24.
Masud Khan, advisor of Crown Cement, told TBS that national cement consumption fell by 1% both in FY22 and FY23 followed by a 1.5% slump in FY24.
Other than individual small home builders across the country, dominantly in the semi-urban and rural areas, who try to accomplish their home building at any cost, helped partially offset the slowdown in other segments, he added.
Monthly sales of cement industry peaked to 46.5 lakh tonnes in February 2022 and even in the best month since then cement sales were 10%-15% lower from the peak, according to BCMA.
New factories building slower
Industrialisation also slowed down as entrepreneurs went conservative in pouring fresh capital for new factories when their existing ones were struggling amid lower demand, higher costs of production, borrowing, transportation and also operations, said Jowher Rizvi, president of Steel Building Manufacturers Association of Bangladesh.
Demand for prefabricated steel buildings factories, the core steel structure of the modern factory buildings, declined by 20% in the past two years, he told TBS.
Entrepreneurs were bold in expansion due to the lower costs of borrowing and a strong economic performance during the pandemic. Now the picture is the opposite.
"Entrepreneurs were bold in expansion due to the lower costs of borrowing and a strong economic performance during the pandemic. Now the picture is the opposite," he said.
Monthly demand for the locally manufactured prefabricated steel buildings surged to 35,000-40,000 tonnes three-years back and has fallen to around 25,000 tonnes now.
Emergence of a new segment, prefabricated steel commercial buildings, helped offset the continued factory building slowdown in FY24, said Rizvi.
Sales volume having a double digit fall in FY23, fell by further 8% in the past fiscal year, he told TBS.
According to the Bangladesh Bank, capital machineries and other capital goods imports fell by more than 11% and 20%, respectively, in FY23. In the first 10 months of FY24 they fell further 7% and 28% from the dented base from the same period of the previous year .
Gas shortage hurts tiles makers
As tiles are used at the last phase of a building construction, demand for ceramic tiles did not weaken too much in FY23. Many incomplete buildings during the pandemic were finished construction in that year.
However, the prolonged slowdown hurt the industry in FY24 drastically.
"Construction tiles sales dropped by nearly 30% in FY24 that followed a 5% slump in the previous fiscal," said Md Shamsul Huda, vice-president of the Bangladesh Ceramic Manufacturers and Exporters Association (BCMEA) and managing director of Great Wall Ceramic Industries.
Alongside the construction slowdown, he also blamed the gas shortage for dragging down the sector as factories had to struggle to continue production and the problem became acute later last fiscal year.
Government buildings were a major destination of locally manufactured tiles and the demand in the segment fell drastically, he said, adding, "A financial burden on manufacturers is becoming heavier everyday due to the less production and sales during a high interest environment."
Due to the ongoing gas shortage, ceramic producers are facing a Tk20 crore loss every day, according to his association.
Paints industry loses gloss
After half a decade of over 6% growth, paint consumption growth slowed to less than 1% in FY23 and dropped by around 7% in FY24 nationwide, said Sazzad Rahim Chowdhury, a director and the chief financial officer of Berger Paints Bangladesh that caters to over half of the national demand.
A financial burden on manufacturers is becoming heavier everyday due to the less production and sales during a high interest environment.
Decorative paints that account for 80% of the total demand are selling less this year due to slower construction of new buildings, he said, adding that repainting that accounts for around one-tenth of the total demand fell sharply as repainting was put on the back burner by inflation-hit families.
"Inflation is forcing people to defer their repainting plans and the segment is significantly hurt," he added.
As new construction is slow, demand for polymer fitting dropped by around 20% in FY24, following a slight slowdown in the previous year, estimates Riad Mahmud, managing director of National Polymer Group, a leading company in the sector.
Capacity utilisation concern
Having seen the steady demand growth over the past one decade, cement companies had poured billions of taka for their economies of scale, alongside preparing to cater to the projected future demand, said Premier Cement's Selim Reza.
This year installed capacity will cross 10 crore tonnes per annum, and the demand is set to be stuck at less than 40% of the total capacity, said Md Shahidullah.
Less than 65% capacity utilisation is not a sustainable situation for cement companies, he said, adding that excessive competition is not allowing most of the companies to transfer all the surged costs to customers.
More production and more sales help distribute fixed costs among more units sold and help firms increase profitability, said companies.
Also, steel manufacturing capacity is set to cross one crore tonnes a year due to the new gigantic investments in the past few years and unless the demand rebounds, the steel industry is also bracing for a capacity utilisation problem, he added.
"If more capacity remains unutilised, industries will be weakened," said Shahidullah.
Publicly listed building material companies' performance also reflect their associations' compiled or estimated figures.
Lafarge Holcim Bangladesh, Heidelberg Materials Bangladesh, all reported sales decline in the first three months of this year, while Heidelberg told its shareholders that in 2023 its cement production and sales dropped by 1.2%.
BSRM Group, the steel market leader, posted a significant revenue drop in the first nine months of the past fiscal year, while a comparatively stable exchange rate narrowed down their foreign currency losses.
Like its competitor GPH Ispat, BSRM Steels managed to almost retain its local market revenue in July to March period of FY24, while it dropped by more than 24% year on year for its other company, BSRM Limited.
Other companies of the sectors which managed to post a turnover growth, enjoyed their newly added production capacity or export revenue. Crown Cement and Premier Cement were gainers in this area.
Higher sales prices to adjust cost hikes, helped companies disclose a better revenue picture if compared to volume.
An unforeseen exchange rate loss in FY23, dragged profitability sharply down for most of the listed firms and a predictability of dollar price later helped recover profitability to a decent extent till March 2024, reveals companies' financial statements.
Echoing Jowher Rizvi, looking into the macroeconomic situation Metrocem's Shahidullah fears a turnaround might be unlikely before the mid-2025.
Gas shortage on top of the increasing fuel and energy prices are getting bigger as a concern for each of the industry people.
