FY27 Water Sector PSDP Cut 22.6% to Rs103 Billion: Cement and Steel Stocks Face Demand Headwinds

The government has announced a notable reduction in the Public Sector Development Programme (PSDP) allocation for the water resources sector for the upcoming fiscal year 2026-27. The proposed allocation stands at Rs103 billion, a significant decrease of Rs30 billion, or 22.6%, from the Rs133 billion originally approved for the current fiscal year. This figure is also substantially lower than the Rs179 billion recommended by the Annual Plan Coordination Committee (APCC), representing a 42.5% shortfall from their recommendation.

What the FY27 PSDP cut means for water projects

The core of the news is a substantial cut in government funding for water-related infrastructure. This includes major projects like the Diamer Basha dam, where the power generation facilities, valued at Rs1.424 trillion, have been entirely dropped from the FY27 PSDP, despite APCC recommendations for a Rs500 million allocation. Other components of the Diamer Basha Dam Project also saw their proposed allocations reduced. For instance, two water-related parts of the project, for which the APCC recommended Rs32 billion, have been revised downwards to Rs14 billion. The overall reduction signals a slower pace of development for critical water security and irrigation infrastructure in the country.

Here is a summary of the allocation changes:

Why reduced development spending matters for construction-linked stocks

The Public Sector Development Programme is the government's primary vehicle for funding infrastructure projects, including dams, canals, and other large-scale construction. These projects are major consumers of raw materials like cement and steel. When PSDP allocations are cut, it directly translates into reduced government-led construction activity. For companies that supply these materials, a decrease in such projects means lower demand for their products, which can impact their sales volumes and, consequently, their profitability. This is a clear negative for the construction materials sector.

Which stocks, and why

Several companies in the cement and steel sectors are likely to face headwinds due to this reduction in government development spending:

• Cement Companies: Firms like Lucky Cement, Maple Leaf Cement, Fauji Cement, Kohat Cement, Cherat Cement, Pioneer Cement, and D.G. Khan Cement all rely on construction demand, with government infrastructure projects being a significant component. Lower allocations for water sector projects will likely lead to reduced cement off-take from these large-scale initiatives, negatively affecting their sales volumes and capacity utilisation.

• Engineering & Steel Companies: Similarly, steel manufacturers such as Mughal Iron & Steel, International Steels, and Amreli Steels supply rebar, billets, and other steel products used extensively in infrastructure development. A cut in water sector PSDP means less demand for these materials from government projects, which could weigh on their order books and margins.

What to watch

Investors should monitor the actual execution of the PSDP throughout FY27, as sometimes allocations can be revised or re-prioritised. It will also be important to watch for any new private sector construction initiatives or other government-funded projects (like those under CPEC) that could potentially offset the reduced spending in the water sector. The overall economic growth trajectory and interest rate environment will also play a role, as they influence private sector construction and consumer demand for housing, which can provide alternative demand channels for cement and steel products.