This week ICR takes a look at the downward trend in coal prices and discusses whether cement producers will benefit from the drop in prices or whether the cement sector should be looking more at sustainable long-term fuel options.
Coal prices cool
Morgan Stanley reports that April's data of Newcastle and Atlantic Basin prices has seen thermal coal retreat by 23-30 per cent YoY, as evidenced by the key contract between global mining company Glencore and Japan's Tohoku Electric Power, ending March 2020, which settled ~US$15/t below the previous-year’s deal at US$94.75/t.
Furthermore, according to ICR's latest energy market report (April 2019) API 2 front-quarter (FQ) and Calendar 20 (Cal20) contracts have seen declines of 13 and eight per cent, respectively, while API 4 FQ and Cal20 prices were down by 12 and nine per cent, respectively.
In terms of Newcastle contracts, the price drop of Newcastle product has been attributed mainly to China’s restrictive import policy, including its delays on receiving Australian product. Going forward, the resumption of active operations in some of China's coal mines such as those in Yulin province is expected to see domestic supply increase, reducing the need for imports and as a result, coal prices could soften further.
Increased domestic output by Coal India has also impacted imports by India, the world's second-largest cement producer, as it reduces its reliance on more-expensive imports and in addition, increased supply in the domestic market puts a downward pressure on prices. However, recent lower freight rates have reduced costs and resulted in a boost for South African coal exports to India.
Further evidence of falling coal prices can be found in Indonesia and South Korea. In Indonesia state-controlled coal miner PT Bukit Asam has seen its profits affected by a 13 per cent YoY drop in coal prices in the 1Q19, while in South Korea, the government’s drive to encourage a coal-to-LNG switch by increasing coal import taxes, is expected to lower demand for coal imports.
Meanwhile, in Europe higher inventories following a mild winter have seen coal prices dip below US$50 in 2019. In addition, lower river levels have impacted the delivery of product to end-customers. The spill-over from oversupply in the Newcastle Basin and Russian companies selling into the ARA also sharply lowered prices. Cheap natural gas and plentiful renewable output also contributed to lower demand for thermal coal.
In the US coal demand and prices have declined, driven by cheaper natural gas from fracking, the persistently-lower costs of renewables and the country's ageing coal fleet.
Development in other fuel markets
The price of coal is also dependent on developments in other fuel markets such as crude oil, natural gas and petcoke. Crude oil production increased by an estimated 1.41mbpd to 98.7mbpd in 2018 while forecasts for 2H19 indicate the 100mbpd threshold will be exceeded, according to OPEC. Price rises have also been seen in Brent crude, having hit US$49.40/b in April 2019, reports the US Energy Information Administration (EIA).
Natural gas prices are expected to fall in 2019 but are forecast to rise again in Europe and the USA in the long term, between 2020-30, according to World Bank estimates.
Furthermore, in the last five years, there has been an 85 per cent correlation between coal and petcoke prices. Therefore, the currently-low coal prices are expected to be reciprocated with lower global petcoke prices. However, petcoke contracts were rising between October 2018 and March 2019, and have only recently started to dip. Just over a year ago, in March 2018, imported petcoke prices to India hit a record high.
Good news for the cement sector?
A fall in thermal coal pricing is expected to ease fuel costs for some cement producers with major winners to be LafargeHolcim and HeidelbergCement. Their fuel mixes include a combined coal and petcoke share of around 67 per cent. In addition, Buzzi Unicem and CRH follow with coal/petcoke shares of 42 and 37 per cent, respectively, reports Morgan Stanley.
However, others are less fortunate. Where thermal coal is in high demand, prices have still been holding up. Vietnam's cement industry is still very reliant on coal and sales to the cement sector during the 11M18 rose by 21 per cent, according to Vietnam News. Moreover, a spike in electricity prices in March resulted in a quick reaction by the domestic cement sector. VICEM, the country's largest producer, raised its cement prices by VND30,000t (US$11.29/t).
The high prices of coal imported into Pakistan has also seen the domestic cement sector affected. Pakistani cement producers with captive power plants that are fuelled by imported coal have seen profitability fall in 2018.
Move towards long-term sustainable fuel pricing
However, rather than being held hostage to fluctuations in global fossil fuel pricing, a proactive approach to long-term sustainable energy solutions may prove a better bet for the cement industry. In comparison to coal and taking into account fuel and CO2 emission costs, renewable energy sources such as biomass, solar and wind power are emerging as attractive alternatives. As a result, key cement producers are developing their renewable energy sources.
In the USA cement producers such as LafargeHolcim are taking a cue from the power generation industry. US wind power-generated electricity rose above 250GWh in 2018, contributing to a fall in coal demand to 688Mt, a four-decade low according to the Institute for Energy Economics and Financial Analysis. To reach its target of a 40 per cent reduction in net carbon emission emissions per tonne by 2030 (1990 baseline) and mitigate the effects of rising fossil fuel costs, LafargeHolcim is building three wind turbines to produce 12GWh of wind energy at its Paulding cement plant in Ohio. Accounting for a fifth of the cement plant’s energy requirement and enabling the company to eliminate 9000tpa of CO2, the project is expected to start generating energy by the end of 2Q19. Paulding Plant Manager, Robert Pitt, sees the 20-year renewable energy agreement with One Energy as "a nice long-term fixed price hedge" on electricity costs.