Coal prices have reached to 10 year high
The global coal prices increased due to a rebound in global economic activity post-outbreak of COVID across the globe. The majority of this incremental demand is driven by strong energy demand in China amid a decline in domestic coal production along with the ban on coal imports from Australia.
Furthermore, average coal prices increased by 11.9% YoY in 11MFY21. To highlight, current coal prices stand at US$112/ton which is up by 46% from the 11MFY21 average of USD77/ton.
To highlight, an increase in coal prices by US$35/ton from 11MFY21 average of US$77/ton would require an average increase of ~Rs41/bag in local cement prices to pass on the impact of higher international coal prices on overall cement production.
As per our working, majority of the impact of coal prices increase to the level of US$93/ton has already been passed on to the consumers as retail cement prices in North/South market increased/decreased by Rs94/2/bag since Jun’20 (increase in retail prices reflects the impact of a surge in other energy/non-energy cost as well).
Furthermore, we expect local cement players to increase their prices post FY22 budget to pass on the impact of ~USD19/ton increase in international coal prices from Apr’21 to date.
Better utilization level given higher cement demand would allow a gradual increase in cement prices in FY22/23, in our view. Moreover, lower finance costs due to reduced interest rates would also support the sector’s profitability. We are positive in the sector with LUCK and KOHC as our top picks.
