LAHORE - Subdued demand from the emerging markets and a shift towards cleaner energy sources in the US, the coal rates in the international market have been tracing a steep falling trajectory, posting a hefty decline of 19% since the start of CY13, reaching to a 4.5-year low of $73/ton.

However, the industry could not benefit from the declining trend of coal rates, as the huge depreciation of rupee against US dollar mitigated the whole gain. In the same way, the cement sector, being a process industry which always requires maintaining ample stock levels for smooth operations, could not avail the advantage of decline in rate, as the average cost to the industry has been around $110 per ton, the same price as was in last financial year, manufacturers claimed.

They said that during last two decades, rupee has depreciated by an average 10 per cent annually, posing a constant threat to steel and cement industry, as there is a close link of local currency depreciation with the cost of production in these sectors. The decline is largely due to recent slowdown in growth in China and weak demand in US. With fuel cost contributing approximately 50-55pc to the total costs of sales, ease in coal prices apparently should have been welcomed by the manufactures, but the facts revealed another story. According to experts, availability of cheap natural gas has encouraged utility companies in the US to switch from coal to gas. As a result, it has created excess supply in the international market. Moreover, soft demand in China and India has pushed coal prices into a downward spiral.

Just to recall, coal prices have already fallen by a fat 19% YoY in FY13 as well to USD 86/ton (Richards Bay FoB). Subdued demand from the emerging markets and a shift towards cleaner energy sources in US has been the major price dampener for coal. Amid this steep fall in coal prices, experts from AHL have revised down our coal price assumption for FY14 to USD 80/ton from USD 92/ton previously.

Although several sectors linked to dollar are going to reap benefits, especially textile, independent power producers, yet the steel and cement industry is among those which would feel the heat, due to their heavily dependence on imported coal. Industry experts said that with rupee hitting record low of 102 against US dollar in interbank market, Pak Rupee has depreciated by over 10 per cent during the current fiscal year due to weak economic fundamentals, widening current account deficit and excessive government borrowing from the central bank. As per experts, rupee depreciation would bode negative for the cement sector as coal which is used for conversion is an imported component. Though the negative impact would be partially mitigated by cement exports for few big players, the net impact on the sector would still be negative. Already under pressure due to low export as well as sales volumes, the cement sector of Pakistan is set to take another hit. With cost structure being linked to both high energy price and soaring US dollar, any increase in both adversely impact the local cement manufacturers, experts opined. The rupee decline may beneficial for cement exporters but unfortunately, the exports are also on decline. Manufacturers said that government has also increased the power tariff for industry and its average impact on cement industry will be at least by Rs1.7 per kwh.