Cement: Coal buffers

While the cement industry certainly has a coal habit to kick, it’s costs of production continue to be heavily dependent on coal, most of which is imported, as a source of fuel. This is why when coal prices in the international markets balloon, and/or the rupee depreciates against the dollar, cement makers have to raise prices to make sure margins don’t plunge.

The past two years have been a whirlwind for coal prices having shot up multiple times over the period due to a confluence of factors. The first push was witnessed right after covid restrictions lifting and markets opening back up leading to a sudden surge in demand, particularly originating from China. The real hike in coal prices however came on the eve of Russia Ukraine war breaking out. Coal prices rose, coming terrifyingly close to its historic highs in the Feb-Mar period .The spike came off of fears that coal supplies will dwindle from these two countries due to disruptions caused by the war. Australian coal (at the Newcastle port) reached a peak price of $440 per ton at the time while South African Richards Bay also rose, landing somewhere at the same spot.

Countries began to move to alternative sources or keep their own coal plants open for a little while longer after promising to phase them out. Prices receded for a while until they shot up once again as demand for winter supplies and fears that inventories will dwindle rose. This was in September. Only two months on, and coal prices have been cut by or close to half, dropping to levels pre-war.

This is a good time for cement manufacturers here at home to evaluate demand and import coal at these low prevailing prices. But they are not short of options either. When coal prices in the global markets rose, cement manufacturers had made the prompt decision to procure local coal and mix it with Afghan coal from next door which they could get for cheaper without having to spend precious dollars in most cases. With global prices falling, cement producers will have the opportunity to optimize their costs by procuring coal in various quantities from sources that are most cost effective.

Putting out that fire however may not be enough for the industry to come back to its past glory as the economy trudges along into more chaos. Construction demand is dried up and with reduced buying power, higher cost of borrowing, cuts in development spending, demand will remain dull over the next coming months save for projects that are already funded and underway. Floods have wreaked a new wave of havoc. Cement manufacturers believe demand would fall 15-20 percent over the year. In4MFY23, cement offtake has dropped 23 percent year on year, of which local offtake slid 22 percent. In October, very firm expectations of demand dropping may be too soon to say, but all signs are blaring red. Flood related rehabilitation may begin but this won’t happen immediately. Meanwhile, builders and contractors are grappling with cost overruns amid suppressed purchasing power of prospective home buyers.

Coal prices may provide relief but this would serve merely as a cushion to the really hard blow that demand would deliver.