Declining coal prices could help offset the brunt of slow cement demand in Pakistan with the former being a critical raw material for cement manufacturers.
According to a report by JS Global, cement dispatches for October 2022 stood at 4.2 million tons (-19 percent Year on Year), taking cumulative dispatches for 4MFY23 to 13.9 million tons, down 23 percent YoY, due to a slowdown in construction activities and the impact of floods.
The declining trend in international coal prices has been a positive for the sector as coal is the major raw material for cement manufacturers, which is expected to offset the impact of dull demand. The Richard Bay coal price quote has declined by 50 percent to around $185 per ton from its high of $360 per ton in early September 2022.
The cement sector will likely stay on the radar in the coming months over the sharp declining trend in coal. Unfavorable repercussions due to ongoing capacity additions by cement manufacturers, however, remain a key concern.
Cement dispatches in October 2022 clocked in at 4.2 million tons, versus 5.2 million tons in the corresponding period last year, registering a decrease of 19 percent YoY. Dispatches were flat on a month-on-month basis. Consequently, cumulative dispatches for 4MFY23 clocked in at 13.9 million tons, depicting a decline of 23 percent YoY due to a slowdown in construction activities and the aftermath of floods. Local dispatches for the Northern region clocked in at 3.1 million tons for the month of October 2022, depicting a decline of 18 percent YoY.
Exports from the region improved and grew by 79 percent on a YoY basis. Local dispatches for the Southern region clocked in at 746,000 tons during the month, a 3 percent YoY decrease. Cement exports, which constitute a major chunk of total dispatches from the region, have declined significantly in the last couple of months, witnessing a drop of 57 percent YoY in October 2022.
On the cost side, cement manufacturers are expected to perform better than what was anticipated at the start of FY23, amid the recent Richard Bay coal price plunge, more than counterweighing the impact of depressed cement demand. The said quote has dropped by around 50 percent to around $185 per ton from its high of $360 per ton in early September 2022.
The price drop is likely due to the dull demand in Europe for the commodity, where coal-fired power plants stockpiles are practically full and are expected to last through the end of the winter season.
The cement industry has historically met most of its coal requirements through South African coal. However, due to the soaring imported coal prices owing to the Russia-Ukraine war during the last few quarters, most cement manufacturers increased the mix of relatively cheaper Afghan coal and local coal from Darra Adam Khel and Dukki in their respective coal consumptions, also reflected in recent quarters’ stable and/or increasing gross margins of cement manufacturers, the report added.
Assuming a mix of 90 percent from the aforementioned blend of Afghan and local coal and the remaining from international coal for cement companies in the North, the cost of coal consumption comes to Rs. 47,800 per ton, which is still around Rs. 6,100 per ton (around 11 percent) below the landed cost of South African coal at current levels.
If international coal prices continue to follow a downward trajectory, local manufacturers are likely to switch back to the South African variant due to its consistent product quality and stable supply chain, added the report.
The report further stated that a quicker-than-expected decline in coal prices is an upside risk for the sector while the long-term fundamentals stay strong. The cement sector will likely stay in the spotlight during the upcoming months over the declining trend in coal prices and prospects for an increase in demand coupled with additional widespread reconstruction demand brought on by flood rehabilitation.
The report has an ‘overweight’ stance on the sector, with Maple Leaf Cement Factory Limited (MLCF) and Lucky Cement Limited (LUCK) among the top picks due to their respective timely expansions leading to tapping higher market shares in the upcoming year. The report also favors Kohat Cement Company Limited (KOHC) because of its outstanding gross level performance, a direct result of its superior cost controls and low leverage ratios.