Continuing the games: Coal Price Decline Sets the Stage for Cement Margins to Explode

Research Team

Table of Contents

The landed cost of Richards Bay coal has decreased to approximately PKR 38,000 per ton, and after factoring in transportation costs to central Punjab, the coal is now priced at around PKR 43,500-44,000 per ton for cement players. Afghan coal, which experienced a decline from PKR 56,000 per ton to PKR 50,000 per ton in the previous quarter, is expected to undergo further reduction.

The Afghan Government has made the decision to reduce export taxes on coal by USD 20 per ton, with the aim of bringing Afghan coal prices close to PKR 44,000 per ton and close to South African coal. This announcement was communicated through a tweet by Ministry of Mines and Petroleum of Afghanistan.

This decline in coal prices, amounting to approximately PKR 10,000 per ton, is expected to have a significant positive impact on cement margins. Efficient cement manufacturers typically utilize around 130 kilograms of coal to produce one ton of cement. Therefore, a PKR 10,000 per ton decrease in coal prices should result in an estimated PKR 1,300 per ton increase in profit before tax for cement firms. It is also important to note that most players also use a proportion of local coal in their mix with MLCF and PIOC using the highest amount of local coal. While we expect local coal prices to decline as well, the total decline might not be as large as prices are already low (we have assumed a PKR 5,000per ton decline in our short workings given below)

During the third quarter of FY23, profit before tax for cement companies ranged from PKR 1,200 to PKR 3,000 per ton. The reduction in coal prices, combined with a PKR 40 per ton increase in cement prices in the north zone over the past month, will contribute significantly to earnings going forward.

The following presents an estimated impact resulting from this decline in coal prices.

Over the past two years, cement players have demonstrated their ability to pass on cost increases and maintain or even increase their profit margins, despite sluggish demand. We anticipate that pricing discipline within the sector will continue.

Our channel checks indicate that cement demand has risen to 125,000 tons per day in June, compared to 90,000 tons per day last month. We believe that increased public spending during the election year could help stabilize cement demand despite economic challenges. Following the announcement of an increase in the Public Sector Development Program (PSDP) by the Federal Government, the Sindh government has also declared a significantly higher development budget and raised the PSDP allocation to PKR 700 billion. Media reports suggest that while the budget for Punjab will only cover four months, PKR 325 billion will be allocated for PSDP spending on completing ongoing projects in Punjab over the next three months.

Important Disclosures


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