Coal comfort

After reaching their peak in March of last year—at US$441 per ton for South African Richards Bay (API4), international coal prices have been on a decline, the downward trajectory becoming more decisive since Dec-22. Now, in the last week of May, coal prices have been trailing US$110 per ton, down 75 percent since the historic peak that materialized last year. Though still well above the coal price average in 2020 and the 5-year average prior to that, coal prices have fallen significantly since last year, as inventories have grown to meet prevalent demand. Here at home, this is good news.

Cement manufacturers in Pakistan consume coal as a major energy source for production and coal constitutes about 60 percent of their primary costs, hence have a huge bearing on margins. With rising coal prices globally in the immediate aftermath of Russian invasion of Ukraine, cement manufacturers were able to divert their coal procurement from global suppliers to coal suppliers in Afghanistan. Afghan coal was more affordable. With international coal prices now on a decline, more options are opening up.

For cement manufacturers located near the port (South zone players), the decline in international coal prices is a major cost advantage specially since freight rates are also falling. They will find it more feasible to import coal from abroad, than procure it from Afghanistan where they incur inland freight and whose prices have been slow to catch up with the global downward decline in coal prices. Last year when coal prices shot up and Pakistan committed to importing more coal from Afghani coal suppliers, the Afghan government was quick to hike up prices, but they haven’t been as quick to drop them.

Manufacturers in the North are likely to continue to utilize Afghan coal as prices are close to Richards Bay coal and may not benefit from shifting. The only problem now is prevailing LC restrictions that are making most importers nervous about keeping their plants operational as they run short of imported inputs. Though international coal may become more cost effective for cement manufacturers in the south, the benefits may not be accrued until import restrictions ease, whenever that may be.