Saturday, January 15, 2011

Cement sector to feel heat as coal prices soar

Cement sector to feel heat as coal prices soar 

KARACHI: Not as much now because of previous inventory build up, the country`s cement sector is likely to feel the heat of the soaring international prices of coal (the black gold), going forward.

Global coal prices continue to climb, already 34 per cent up since June last year. The two major reasons listed by market watchers were: Temporary supply shocks from Australia and a higher demand in China.
”Floods in Australia have somewhat caused a chaos in the world coal market”, says Farhan Bashir Khan, analyst at InvestCap.
Analyst maintains that the carryover inventories of coal would delay the hit on cement industry for the present because most of the concrete producers had switched from costlier furnace oil to coal in the past, when crude price was making new highs.
The country boasts large deposits of coal, but due to its inferior heating value and higher sulphur content, cement players mainly rely on imported supplies.

The cement sector has been plagued by reduced dispatches (both local and export), leading to low capacity utilisation–66 per cent during first six months of financial year 2011. “However, this also enabled concrete producers to accumulate coal inventories, which were carried over at relatively low price of $115 per ton, which would keep the profitability of the sector intact partly during ongoing winter season”, says analyst at InvestCap.

As cement demand climbs post winter, fresh imported coal would likely to cost a good deal more and exert pressure on profitability of domestic cement producers. In such a scenario, the price, which a bag of cement could fetch in the local and export markets, would determine the fate of manufacturer`s profitability.

Historically, higher dispatches in spring season have led to bloom in cement prices. This time around, gas shortages and higher coal price, nonetheless, will continue to turn up the heat on cement sector.

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