Coal price hike to hurt Pakistan cement sector’s earnings

Coal price hike to hurt Pakistan cement sector’s earnings
Published: 02 July 2008

Pakistan cement manufacturers are seeking an increase in prices in the wake of rise in international coal prices by 139 per cent during financial year 2008.

In tandem with international oil prices, the coal price has also been on the rise, as prices hit the US$186/t CIF mark (US$163/t FOB) during June-2008.

The coal price up tick so far can be divided into three major phases during financial year 2008: coal prices rose by 26 percent during first quarter of financial year 2008 (Jul-Sep-07 from $80 per tonne to $101 per tonne CIF); another round of price hike by exactly 26 percent from September 2007 to January 2008 was observed (coal prices touched $128 per tonne CIF); and the last rally in prices went as high as 46 percent (from February 2008 to date). The price levels may continue to persist as long as international oil prices do not show any sign of slowing down.

The coal cost consists of around 50 to 60 percent of the total production cost. Except a few manufacturers all cement-makers (above 90 percent) have converted their plants to coal, which have made them vulnerable to the recent price hikes in this commodity.

The manufacturers have already posted significant losses mainly because of the recent unprecedented rise in coal prices (65 percent decline in profitability recorded during nine months of financial year 2008 by all the manufacturers in the industry). Coal costs around Rs 64 per bag. The retail price pass-ons (5 to 6 increases of about Rs 10 to Rs 15 per bag) could not make up for the recent price hikes, which may result in further deterioration in gross margins of the manufacturers. Moreover, the expected gas price increase may also hit some of the cement manufacturers’ earnings further.