While coal exporters around the world might have creased foreheads, local cement manufacturers have certainly been lucky. The most important factor in the cost of production of cement, coal prices, has been on a freefall for over two years now.
And the good news for the cement sector - the cement manufacturers to be specific – is that outlook for FY14 is nothing different from what the prices have been in FY13. All factors that have been dragging coal prices seem to continue with their hammering for at least sometime.
For one, with increasing shale gas production the United Sates is expected to become ever more ambitious as it shifts its power generation fuel from coal to natural gas. This has led to increased coal exports in the US amid higher reliance on cheaper natural gas. As more coal will continue to enter the market, prices of the black gold would remain bearish.
Not only that, the increased dependency on cleaner and greener energy resources is also expected to increase regulation on carbon emissions which is labelled as Obama’s war on coal.
Secondly, coal demand in China and India is also on the ropes. According to the latest BP Statistical Review, growth in global coal consumption of 2.5 percent in 2012 was way below the 10-year average of 4.4 percent primarily due to slower economic growth in China and India.
And so the substantially depressed coal prices will be a gem for the local cement sector. What must not be forgotten is what Inayat Ullah Niazi, CFO at DG Khan Cement reckoned in an earlier conversation with BR Research: cement prices will not collapse anytime soon as increased domestic demand is bound to create shortage and drive cement prices up unless capacity is enhanced.
The industry posted a record level of local cement dispatches in FY13 amid static export sales. And with a 36 percent higher PSDP allocation, a bearish view for coal prices will be a boon for cement industry margins.