Cement company shares prices in India fell this week due to energy supply concerns in the wake of the US-Israeli-led war with Iran. The situation appears similar, so far at least, to the energy shock that followed the Russian invasion of Ukraine in early 2022. We will look at the available news on the situation so far and reflect on what happened in 2022.
The decision by the Islamic Revolutionary Guards this week to ‘close’ the Strait of Hormuz in retaliation to US and Israeli air strikes is the key challenge to energy intensive industries outside of the region. Today’s news reports of commercial ships being damaged in the area further heightens tensions. The International Energy Agency (IEA) estimates that 20% of the world’s seaborne oil trade transits through the waterway. The markets reflected this with a jump in oil prices this week as well as a dip in the share prices of industries likely to be adversely affected, such as the cement sector.
At the end of last week, trade analysts Kpler released an assessment of how the start of the war had affected bulk commodity trade. It noted that Qatar’s decision to declare force majeure on gas exports was contributing to the increase in the price of gas and has major implications for the economics of switching between gas and coal not seen since 2022. Demand from Europe for seaborne coal might rise consequently. It also identified that petcoke exports from Saudi Arabia, the UAE and Oman to China and India were particularly vulnerable to disruption in the Strait of Hormuz. It said that, “Indian cement producers, reliant on fuel-grade petcoke, face the sharpest supply risk and would be forced to source US petcoke at a premium or switch to coal.”
Sure enough the stock market in India reacted at the start of this week. As the Business Standard newspaper noted, for example, the stock price for Ramco Cement fell by 7%. It linked this to the vulnerability of cement production to energy prices, particularly those of petcoke and coal. Oil price increases can also increase logistics costs of moving input and output materials around, and raise the cost of electricity. It placed the volume of petcoke going through the Strait of Hormuz at 0.4 - 0.6Mt/month with India “...absorbing the majority of this.” The country imports half of its requirements of petcoke, signalling that prices are likely to rise. The brokers quoted predicted that these costs would be passed straight on to consumers.
In Pakistan the Iran war has prompted calls for development of the Thar coalfield to be exploited faster to reduce reliance on imports. This is a long-term project but recent events may hasten it. The Dawn newspaper reported that imported coal prices increased by 22% year-on-year in recent weeks to around US$110/t FOB. The local cement sector in Pakistan uses 5Mt/yr of coal and it plans to use up to 20% coal from Thar. Meanwhile, the local press in Bangladesh has been keenly interested in which ships had made it through the strait before the war. Shipments of liquefied natural gas and liquefied petroleum gas that had transited in time were noted. As too were vessels carrying clinker, gypsum and limestone from the Gulf. The first of those is of particular interest in Bangladesh given its relative lack of domestic clinker production. However, alternative sources should be easy enough to find in a world making too much clinker.
The energy market consequences of the Russian invasion of Ukraine in 2022 were a spike in energy prices in the short term. In March 2022, for example, the head of Türkçimento warned that a jump in the price of Newcastle Coal posed a serious threat to the sector and that the cost of cement from a plant using imported coal might rise by around US$15/t. In the medium term, Russian gas and coal exports shifted away from European markets to Asian ones. For example, the US Energy Information Administration (EIA) reports that Europe and Türkiye received 32% of Russia’s coal exports in 2020. By 2024 this had fallen to 13%, with Türkiye accepting the vast majority. Natural gas exports fell from around two-thirds in 2020 to over one-third in 2024. Major multinational cement producers reported a mixed response to energy costs in 2022. Reasons for this included regional variation within operations, the hedging of energy costs and the use of alternative fuels. Cemex, for example, noted that it had been subject to “uncertain energy supply availability” as a result of the war in Ukraine. Heidelberg Materials said that the “...2022 financial year was characterised by a significant increase in production costs, especially in relation to energy, fuels, and raw materials, which we countered with price adjustments.”
Finally, there is no information readily available of the effects on the war upon the cement industry in the Gulf countries and Iran. Industrial sites such as refineries or desalination plants have reportedly been damaged in the Gulf countries. There is little to no information on the situation inside Iran. If readers have any information on the situation locally they should get in touch.
So far the war in Iran has shown the reliance that cement production in India has on petcoke from the Gulf. Stronger repercussions are likely the longer that the Strait of Hormuz remains blocked. Energy users may start to switch fuel types as the cost of previously favoured fuels escalate. Cement producers are likely to be hedged against this to an extent but there will be considerable regional variation. All of these price rises are expected to be passed to end consumers and inflation rates could rise. This, in turn, may slow construction rates. One positive to end on is that rising alternative fuels utilisation rates may protect cement producers somewhat. Expect more impetus for thermal substitution rates to carry on rising.
