The cement scripts in Pakistan Stock Exchange (PSX) saw a selling pressure yesterday, apparently due to an increase in coal prices and continued depreciation of Pak rupees against the dollar.

According to a report of Spectrum Research, higher coal prices may reduce the profitability of the cement sector in Pakistan. Coal is a significant component of the cement manufacturing process as it constitutes an average ~35% to 42% of COGS for most cement companies.

Coal prices have been increasing from Jun ’21 to date as they increased by 33% to USD153/ton from USD 114.90/ton. In 2QFY21, coal prices posted an increase of 26%QoQ to USD130/ton.

During the last five days, coal prices registered a significant surge of USD15/ton. If coal prices continue to follow the same rising trend, it will hurt cement companies’ profitability until they entirely pass on the impact.

To highlight, for every $10/ton hike in coal prices, cement manufacturers will have to increase cement prices by ~PKR 10-14/bag to pass on the adverse impact

Outlook

We expect cement sector earnings to witness a diminishing trend in margins due to higher coal prices, while the pace of pass on the impact would decide the future earnings.