March 10, 2022 (MLN): Amid war between Russia and Ukraine, Coal prices have touched all time high of $460/ton, gaining 114% in just last 3 weeks. This has forced local cement players to switch towards other resources where Afghan coal has taken a lead by cutting down input cost and providing a breathing space.
Players like Cherat Cement (CHCC), Lucky Cement (LUCK), and Maple Leaf Cement Factory (MLCF) have switched to 60-70% usage of Afghan coal while Pioneer Cement (PIOC)’s usage stands at 40-50% and DGKC is using 20-30% Afghan coal in Northern region. Similarly, other players are also meeting a major portion of their overall coal requirement from Afghan origin coal.
Afghan coal used to trade at 25 to 30% discount to Richards Bay coal (RB1) until few weeks ago. This differential has increased in recent days post significant jump in RB1 prices. As per market sources, on-site delivered Afghan coal price in North currently stands at around USD235/Ton. This indicates that delivered prices are less than 50% of South African comparable coal. Similarly, usable domestic coal trades at around USD 170/Ton i.e. at 64% discount to RB1, note by Foundation securities cited.
Monthly availability of afghan coal ranges from 0.2-0.25mn tons while local coal’s availability is in the range of 0.1-0.125mn tons. North’s monthly demand of coal at 0.42-0.45mn tons currently hence, Northern region can easily replace 65-70% of its coal requirement through afghan coal, another report by AKD Research noted.
Even though players are switching towards Afghan coal, price increase is warranted as witnessed recently where Northern region hiked cement prices by Rs50/bag. In addition, another hike of Rs50/bag is likely in next 2-4 weeks, it added.
Meanwhile it is important to note that availability of Afghan coal is a major impediment for some companies in moving away from imported coal. Thus, the players who were early adapters of Afghan coal maintain an edge over other players in procurement.
Moreover, the limited coal inventory and the unreliability of the supply chain of Afghan coal pose a risk on sustainability of the cement operations if the prices remain at current levels. This may lead cement players to shut down their plants until reversal of commodity prices.
According to the AKD research, situation in South is trickier as Afghan coal is not currently being utilized where the players in the region have stopped taking export orders currently due to low prices of clinker while they also prioritize local market in a bid to improve longevity on current stock of coal.
Nevertheless, Afghan coal is beneficial for cement manufacturers as Afghan and local coal trade at steep discount to comparable international benchmarks and thus provides significant cost saving to those using them. Northern cement plants are the prime beneficiaries as almost all manufacturers have already replaced Richards Bay coal (RB1) with a mix of Afghan and local coal.
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