Global coal prices continue to climb, already 34 per cent up since June last year. — File Photo

KARACHI: Not as much now because of previous inventory build up, the country's cement sector is likely to feel the heat of the soaring international prices of coal (the black gold), going forward.

”Floods in Australia have somewhat caused a chaos in the world coal market”, says Farhan Bashir Khan, analyst at InvestCap.

As the biggest exporter of coal in the world market--accounting for 26 per cent share in all of global exports, Australia's supply of coal is crucial to maintain sanity in the supply and pricing.

China is pre-dominantly dependent on the coal, for it stands out as the biggest consumer of the commodity, accounting for 46 per cent of aggregate world consumption.

”Going forward, China's demand for coal is expected to gather further momentum, which already is growing at 5 year CAGR of 10 per cent”, says Farhan, adding that the lower hydel generation and increasing proportion of coal in China's energy mix was perceived to be the major reason behind the optimistic demand trend.

Meanwhile, the floods in Australia had caused a coal supply flux, which eventually reflected in higher coal prices. But for all that analyst points out that coal was still trading at historical discount levels to crude oil prices.

The price gap had, however, narrowed due to additional demand of the black heating commodity. The rally in coal prices was at least in part attributed to crude oil movements.

Analyst maintains that the carryover inventories of coal would delay the hit on cement industry for the present because most of the concrete producers had switched from costlier furnace oil to coal in the past, when crude price was making new highs.

The country boasts large deposits of coal, but due to its inferior heating value and higher sulphur content, cement players mainly rely on imported supplies.

The cement sector has been plagued by reduced dispatches (both local and export), leading to low capacity utilisation--66 per cent during first six months of financial year 2011. “However, this also enabled concrete producers to accumulate coal inventories, which were carried over at relatively low price of $115 per ton, which would keep the profitability of the sector intact partly during ongoing winter season”, says analyst at InvestCap.

As cement demand climbs post winter, fresh imported coal would likely to cost a good deal more and exert pressure on profitability of domestic cement producers. In such a scenario, the price, which a bag of cement could fetch in the local and export markets, would determine the fate of manufacturer's profitability.

Historically, higher dispatches in spring season have led to bloom in cement prices. This time around, gas shortages and higher coal price, nonetheless, will continue to turn up the heat on cement sector.