Industry

Coal prices slump over drawdown in demand

Karachi, August 19, 2019: Imported coal prices in Pakistan track the South African Richard’s Bay Index which has displayed weakness recently. Prices have come down under USD 60/ton, (at USD 59.55/ton at present), by 45percent from a one year high of USD 109.05/ton (Jul’18).

According to a research report, pertinently, waning demand from the largest export market of the Richard’s Bay Coal Terminal (RBCT) – India, amid slow down in GDP to a 5-year low of 6.8percent in FY19 and latest weakness in the manufacturing sector, appear to be a big challenge for the commodity. 

More importantly, a shift in preference for similar quality Australian coal (rendered more competitive in pricing) has queued massive inventory buildup at the RBCT of over 5million tons and pushed prices down.

While Pakistan, another significant export destination of RBCT, has embarked on a journey to shift commitment to domestic coal and renewables as historically, reliance on import of fossil fuels has weighed down on its import bill and contributed significantly to economic woes.

This is followed by South Korea, which has also disclosed long term plans to distance itself from coal-fired generation to other renewables sources.

In the developed world too, coal demand is set to contract. As per the US Energy Information Administration, coal consumption is set to hit a 40-year low in the US at a little over 600mn tons in 2019. Whereas floods in China have filled up reservoirs to the rim and make a stronger case for a hydro generation (amongst other renewables) over a coal-based generation.

Hence, as upcoming coal demand heads down south, futures on the Richard’s Bay Index (Sep’19) have followed suit and are currently hovering near USD 59.05/ton.

The domestic cement sector remains widely exposed to coal price fluctuations as it forms roughly 40-50percent of costs of goods sold, primarily being used as fuel for kiln as well as energy generation.

Given the importance, and stark decline the commodity has observed in the past few weeks, we have analyzed the impact below. Our FY20 coal price assumption is conservatively set at USD 80/ton (average since Jan’16 to date; since the commodity last appeared near current levels in CY16). We do highlight that the impact of muted coal prices will become more visible from 2QFY20 as the prior stock of coal will keep averages less favourable in 4QFY19 and  1QFY20.

Our workings suggest that DGKC appears most sensitive to changes in coal prices with its FY20 earnings undergoing a jump of 54percent (PKR 1.04/share) with every USD 5/ton dip in average coal prices. The massive volatility is on account of low earnings base and requirement for its captive coal power plant.

For similar reasons, MLCF also remains highly sensitive to variations in coal prices (earnings alter by 19percent, or PKR 0.56/share, with every USD 5/ton change in coal prices).

In addition, we flag LUCK as another key beneficiary of lower coal prices in lieu of its efficient inventory management (FY20 earnings vary by 6percent, or PKR 1.84/share, for every USD 5/ton change in coal prices). Although, KOHC remains more sensitive to coal prices (earnings witness a hike of 7percent, or PKR 0.86/share, with every USD 5/ton change in coal prices).

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