Coal prices hit the highest level after a 2.5 year
Benchmark Richard Bay thermal coal prices are maintaining their northward trajectory, currently trading at US$102/ton (FOB) — hitting its highest level after a gap of around 2.5 years.
Over the past two weeks, coal prices have witnessed a sharp rally of 8% attributable to ongoing tensions between China and Australia, heightened in the last few days after the Chinese government ceased economic dialogue with Australia amid flaring diplomatic tensions.
Relations between China and Australia had soured over the past year when Canberra called for an international investigation into the origin of the coronavirus without diplomatic advice, and Beijing eventually seized several commercials on alcohol, barley, cotton, copper, and coal. It has led to the rising trend in coal prices.
China and Australia, two of Asia Pacific’s largest trading partners, have been embroiled in a political dispute since last year that has left several unresolved trade barriers.
On April 19 last year, the Australian Foreign Minister has appeared on national television to demand a global investigation into the origins of the coronavirus epidemic, including the initial outbreak in Wuhan, without prior diplomatic consultation with Beijing.
Earlier this week, Australian Prime Minister Scott Morrison suggested that WHO investigators in Wuhan with the same powers as UN-backed weapons inspectors.
Thus, with China looking to source coal from destinations other than Australia, South African Richard Bay thermal coal price has seen a surge over the last two weeks. Coal prices are at the highest level today.
In Pakistan, higher prices of coal affected local cement manufacturers as coal contributes around 40-45% of the total cost at local plants.
Our FY22 average coal price assumption is US$80/ton, Sherman Research said in a report.
Coal averaged around US$75/ton during FY21YTD. For every US$5/ton rise in coal price, the cement earnings erode by 10% assuming manufacturers absorb cost pressures. As per our estimates, cement companies are sitting at an average coal inventory of around US$80/ton, it said.
Assuming prices of coal remain at current levels, we estimate cement manufacturers to increase per bag prices by around Rs30 to pass on mounting cost pressures. We currently have an ‘Over-Weight’ stance on the sector, the research said.
