Cement sector to be the major victim of higher coal prices: Insight Securities

December 26, 2018 (MLN): Coal prices have displayed strong growth despite a nearly 40% decline in the prices of crude oil since September 2018. Even though both the commodities differ in uses, it is generally believed that lower crude prices would lead to lower coal prices as well.

However, a recent report by Insight Securities says that the correlation between crude and coal prices has weakened in recent years due to global shift in power generation from oil to cheaper alternative sources including coal. Therefore, it cannot be assumed or perceived that lower crude oil prices would lead to similar outcome for coal prices.

Coal prices were also expected to suffer as global economies intend to move away from coal to eco-friendly renewable sources to protect environment. However, the demand for coal stood unaffected as slowdown in demand from developed economies like Europe and North America was offset by rising demand from other emerging countries due to its affordability as a source of power generation. This trend shall continue for at least another five years, says a latest report by IEA.

On sectoral basis, it is believed that cements would be the major victim of the higher coal prices, where every $10/ton increase in coal prices might result in 14% fall in cement earnings. Companies operating coal based captive power plants like FFBL would also be affected.

On the contrary, this might prove beneficial for global urea prices as they are linked to coal prices, the report further added.

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