Coal has played quite the havoc in global markets over the past year. Surging energy demand as lockdown restrictions lifted and industrial activity resuming caused prices of coal to shoot up with China driving a huge portion of this demand. Inventories could not be replenished fast enough. Prices of coal from different locations rose as much as 200 percent sending shockwaves across economies hungry for coal. Pakistani cement manufacturers also faced the brunt of that.
A large number of them—particularly those located in the north and hence closer to Afghanistan—decided to procure from the neighbouring country hoping to bypass the price rally seen in coal originating from South Africa or Australia. Most plants have been meeting 30-40 percent of their coal requirement through Afghan coal that came at a discounted price of 25-30 percent compared to South African coal. But that price gap is now closing as Afghan coal is becoming more expensive on the back of demand growth and deteriorating political situation.
The latter is also why Afghan coal is in short supply. Precarious political and economic climate in the country makes it an unreliable source. Meanwhile, though Afghanistan has huge coal reserves, a large portion of them are deep and inaccessible.
Increase in coal costs in addition to the ballooning freight rates propelled cement manufacturers to raise prices several times over the past year with prices 16 percent higher than they were in July. If cement makers were depending entirely on South African coal, they would have raised prices a lot more.
Prices in the global markets eased slightly as China ramped up mining efforts and secured inventories, but it seems markets will continue to remain volatile. Recently, Indonesian government decided to ban coal exports because local suppliers were not meeting domestic demand (read more: “Coal calling”, Jan 20, 2022). This caused price ripples once again in the global market as Indonesia is one of the largest coal exporters in the world.
While the global situation eases, Afghan coal’s shortage and closing price gap between Afghan and international coal would drive cement prices here upwards, especially if domestic demand begins to show momentum. Thus far, domestic demand for cement has remained dull. In 1H, cement offtake in the local markets grew only 2 percent. But cement manufacturers are optimistic about demand. If demand really takes off—and given the coal dynamics coming into play—prices will too.
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