Although there has been a big move away from fossil fuels in many parts of the world, the cement sector still relies on coal as cheap fuel to fire a good number of its cement kilns. Yet, in the last six months the price of coal on world markets has doubled, placing pressure on cement producers to increase prices to protect margins.

HeidelbergCement has estimated a seven per cent rise in its energy costs for 2017, equivalent of US$130-150m, while LafargeHolcim are predicting a 10 per cent cost increase to CHF300m (US$300m). Meanwhile, Buzzi Unicem anticipates a US$2/t energy cost rise, but has also forecast a cement price increase of US$5/t in 2017 to offset input cost inflation.

The impact on cement producer's energy costs has been estimated by Bernstein analysts to be as much as 13 per cent (US$1.4 increase per tonne). But cement companies often use energy price rises as a way to raise cement prices and cover their costs, so that margins are not hit too severely. Coal costs typically make up US$5/t of the price of cement, claims Bernstein. A 4-5 per cent price rise in cement may well be triggered by further coal price spikes, as happened in 2011, the last period of high coal prices.

China influences the market
Much of the pricing structure for coal is set by China. The Chinese government had imposed production caps on miners, while a memorandum was signed on 11 January to define a target price of CNY535 for 2017 prices, with the government set to intervene if the coal price moved by more than 12 per cent beyond this target price during the year. By reducing the number of days that Chinese coal was mined from 220 to 276, the government had intended to encourage industry consolidation, but the consequence was price speculation and a more volatile international coal market.

The volatility of the global coal market is very evident. Richards Bay Coal in South Africa hit US$99/t in November 2016, up 106 per cent on the 1H16 average of US$48/t. The new Chinese MoU may serve to hold international prices down to US$75-80/t if it is successful, but cement companies who are short, without large coal stocks or typically buy on the spot market will be financially exposed if the volatility continues into 2017.

Europe has distribution concerns
Europe has seen dry weather problems also having an impact on coal supply and prices. The poor weather and low water levels has prevented coal barges in the Rhine and Ruhr rivers from being fully loaded, leading to a shortage of supply for power and cement plants, reports Argus Media.

India has to pay for scarcity of supply
Indian cement producers could be about to get some relief on coal availability with Coal India Ltd’s second phase of auction of coal linkages to the non-regulated sector (sponge iron, cement, steel and aluminium). Coal allocation is decided in this way by the Standing Linkage Committee and will see about 14.5Mt of coal is to be auctioned this January. In June 2016 is was reported that Coal India Ltd would offer 2.15Mta of coal linkages to the cement sector.

The Cabinet Committee on Economic Affairs made coal available to the non-regulated sector by the auction route last year, to ensure fairer distribution of the limited stocks for industry. The Indian market has seen cement producers alternate between coal and petcoke when coal prices rise. In December 2016 imported coal reached US$95.75/t in India from US$52/t in July 2016.