Karachi, November 14, 2022 (PPI-OT): Falling coal price could offset brunt of slow cement demand
As per the latest data, cement dispatches for Oct-2022 stood at 4.2mn tons (-19% YoY), taking cumulative dispatches for 4MFY23 to 13.9mn tons, down 23% YoY, over slow-down in construction activities and impact of floods.
On the other hand, declining trend in international coal prices has been a positive for the sector as coal is the major raw material for cement manufacturers, which is expected to offset impact from dull demand. The Richard Bay coal price quote has declined by ~50% to ~US$185/ton from its high of c. US$360/ton in early September 2022.
In our view, the cement sector will likely stay on radar in coming months over sharp declining trend in coal. Unfavourable repercussions due to ongoing capacity additions by cement manufacturers, however, remains a key concern.
Dull dispatches in Oct-2022
Cement dispatches in Oct-2022 clocked in at 4.2mn tons, vs. 5.2mn tons in the corresponding period last year, reporting a decrease of 19% YoY. Dispatches were flat on a MoM basis. Consequently, cumulative dispatches for 4MFY23 clocked in at 13.9mn tons, depicting a decline of 23% YoY due to slow-down in construction activities and aftermath of floods. Local dispatches for the Northern region clocked in at 3.1mn tons for the month of Oct-2022, depicting a decline of 18% YoY. Whereas, exports from the region improved and grew by 79% on a YoY basis. Local dispatches for the Southern region clocked in at 746k tons during the month, an 3% YoY decrease. Cement exports, which constitute a major chunk of total dispatches from the region, have declined significantly in the last couple of months, witnessing a drop of 57% YoY in Oct-2022. A table with provisional company-wise numbers is shared in the end.
Likely to be offset by ongoing coal price plunge
On the cost side, cement manufacturers are expected to perform better than what was anticipated at the start of FY23, amid recent Richard Bay coal price plunge, more than counterweighing impact of depressed cement demand. The said quote has dropped by ~50% to ~US$185/ton from its high of c. US$360/ton in early Sep-2022. The price drop is likely due to the dull demand in Europe for the commodity, where coal-fired power plants’ stockpiles are practically full and are expected to last through the end of winter season.
The cement industry has historically met most of its coal requirements through South African coal. However, due to the soaring imported coal prices owing to the Russia-Ukraine war during the last few quarters, most cement manufacturers increased mix of relatively cheaper Afghan coal and local coal from Darra Adam Khel and Dukki in their respective coal consumptions, also reflecting in recent quarters’ stable and/or increasing gross margins of cement manufacturers. Assuming a mix of 90% from the aforementioned blend of Afghan and Local coal and the remaining from international coal for cement companies in the North, the cost of coal consumption comes to ~Rs47,800/ton, which is still ~Rs6,100/ton (~11%) below the landed cost of South African coal at current levels.
If international coal prices continue to follow the downward trajectory, local manufacturers are likely to switch back to the South African variant due to its consistent product quality and stable supply chain.
Opportunities in the listed space intact
We believe that quicker than expected decline in coal prices is an upside risk for the sector while the long-term fundamentals stay strong. In our view, the cement sector will likely stay in the spotlight during the upcoming months over declining trend in coal prices and prospects for an increase in demand coupled with additional widespread reconstruction demand brought on by flood rehabilitation.
We have an Overweight stance on the sector, with Maple Leaf Cement Factory Limited (MLCF) and Lucky Cement Limited (LUCK) among our top picks due to their respective timely expansions leading to tapping higher market shares in the upcoming year. We also like Kohat Cement Company Limited (KOHC) because of its outstanding gross level performance, a direct result of its superior cost controls and low leverage ratios.
On the other hand, unfavourable repercussions of upcoming capacity additions by cement manufacturers, remains among key concerns, also echoed by some quarters of the market, discussed in our recent note, ‘Cement – How are money managers positioning?’.