Drop in coal prices by $10 likely to increase cement profitability by 15%

February 11, 2019 (MLN): Lately, a lot of factors have been influencing movements in international coal prices. These factors pertain to both domestic and global motives and have left an impact on some of the major industries of Pakistan, particularly the cement sector. Backing this stance, a report by Insight Securities states that weak demand and supply ramp-up have caused 12% decline in global coal prices to $83.75/ton, compared to $95/ton in mid-Jan 2019.

The global factors inducing coal price movements include the ongoing US-China rift. While both the countries are all set to enter into the final phase of trade negotiations before March, the outcome of this meeting would determine the future course of Chinese mainland growth, having implications for metals (Steel, Aluminum, Iron ore, Copper) and energy (Crude oil, gas and coal).

Keeping in view the weak correlation of coal prices and crude oil prices, the future Short to Midterm coal prices would be likely influenced by demand from China, India and other emerging economies, whereas shift to alternate energy sources from coal for power generation would keep the longer term coal price expectations low.

On the other hand, local factors comprise of 18% YoY drop in domestic dispatches in Jan-19 resulting from economic slowdown, as well as PKR devaluation by 25%, both of which have resulted in cement sector margins to shrink from +40% in 2016 to 23% in recent quarters.

Similarly, rising interest rates (SBP policy rate hike of 450 bps) have also affected the financial health of companies which ventured into expansion through loans. Recent fall in coal prices would therefore provide a breathing space at the time on new capacities coming in (9.5 million tons by Jun-19 and 7.9 million tons in FY2020).

Assuming the coal prices to be $92.5/ton for 2HFY-19 and $90/ton for FY2020, it is likely that MLCF and PIOC would emerge as the major beneficiaries of falling coal prices. In addition to using coal for burning, MLCF captive power plant also runs on coal while thin margins and higher leverage would bring higher percent gains for PIOC.

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