Home / Brokerage / AKD Quotidian about Cements: Coal Prices – The La Nina Effect!!

AKD Quotidian about Cements: Coal Prices – The La Nina Effect!!

Karachi, October 13, 2011 (PPI): The Australian Bureau of Meteorology has issued cyclone warnings to the Queensland area, stating concerns over expected above-average rainfall in the area.

According to AKD Securities, Queensland, accounting for 40% of world coking coal supplies, had been exposed to similar weather conditions in Jan’11, when most of the mines remained shut for months, disrupting coal exports and leading to a price hike to US$330/ton (from US$285/ton). Though coking coal is mainly used in steel manufacturing, any hike in this variant also leads to a surge in prices of thermal coal (used as fuel in cement plants). This hike in coal prices was the main reason for the increase in cement prices in mid-FY11. In AKD’s view, if coal prices spike again, domestic cement manufacturers may find it difficult to raise cement prices which may lead to tighter margins, if this materializes, AKD Securities estimates FY12F EPS impact of 2%-17% on LUCK and 7%-66% on DGKC in case coal price spikes in the range of 5%-14%. That said, cushion on margins should be provided by the TDF (Tyre Derived Fuel) and RDF (Refuse Derived Fuel) plants, which are expected to commence operations by Nov’11. At current price levels, AKD Securities has a Buy stance on both LUCK (FY12 PER: 6.2x) and DGKC (FY12F PER: 10.6x), which provide 26% and 50% respective upsides to AKD’s target prices of PkR100.67/share and PkR33.86/share.

FY12F EPS Impact

Coal price growth 5% 10% 12% 14%
LUCK -2% -10% -14% -17%
DGKC -7% -40% -53% -86%

Source: AKD Research

The La Nina arrival: According to a media release by Australian Meteorological Department, chances for above-average rainfall in Queensland are 65%-70% and there is a fair probability of the “La Nina” weather phenomenon revival, though the effects may not be as severe as they were in mid-FY11 when La Nina caused a shutdown of coal reservoirs and hike in coking coal prices by 16%QoQ. However, some market reports suggest coking coal could reach US$350/ton in case the mid-Jan’11 situation repeats.

Growing steel demand – a further consideration: As per the World Steel Association, steel use is expected to increase by 6.5%YoY to stand at 1,398mmt in CY11. This should be followed a 5.4%YoY increase in CY12.

Growth forecasts corrie despite ongoing turmoil in world financial markets, Europe’s sovereign debt crisis and political unrest in the MENA region. While growth dynamics in the developed world appear subdued, incremental steel demand is expected to arise from the under-developed and developing economics. According to the World Steel Association, in CY12, the emerging and developing economies will account for 73% of world steel demand against 61% in CYO7. The anticipated growth in steel demand, should eventually lead to a surge in coal demand.

Investment Perspective: Given the above developments and already high cement prices in the country, AKD Securities believes domestic cement manufacturers will find it difficult to increase cement prices any further. While a hit on margins remains a risk, the expected start of operation of the TDF and RDF plants should provide some cushion to margins. At current price levels, AKD Securities has a Buy stance on both LUCK (FY12 PER: 6.2x) and DGKC (FY12F PER: 1O.6x), which provide 26% and 50% respective upsides to AKD’s target prices of PkR100.67/share and PkR33.86/share.

Leave a Reply

Scroll To Top