High coal prices squeeze cement makers' margins in 2011

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High coal prices squeeze cement makers' margins in 2011

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* Petcoke, coal prices seen firm through 2011/12

* Cement makers to boost alternative fuels to cut costs

* India, China are biggest cement consumers of coal

By Jackie Cowhig

LONDON, May 5 (Reuters) - Cement makers squeezed by the 45 percent rise in coal costs in the past six months must cut output in oversupplied markets and use more alternative fuels, cement industry sources said on Thursday.

Prices of coal and petroleum coke, a by-product of oil refining, are forecast to remain above $100 a tonne for the next few years and cement makers are reluctantly starting to accept high fuel costs are here to stay, they said.

Steam coal prices rose from $90 in October to nearly $130. Petcoke rose similarly to around $135 a tonne free-on-board U.S. Gulf ports.

International cement makers such as Lafarge (LAFP.PA: Quote) and Holcim (HOLN.VX: Quote) are exposed to coal price moves because they have coal-consuming plants all over the world.

There is too much cement production capacity not just in Europe and coal and petcoke prices have risen over 40 percent," one cement industry source said. "People are starting to realise that prices won't fall below $100 -- this is killing us."

"Domestic cement prices are under pressure, in Europe the euro is very strong and after 2012 it won't be possible to sell surplus CO2 credits," he added.

Globally around 300 million tonnes a year of coal equivalent steam coal, lignite and petcoke is used to make cement.

Coal or petcoke is burnt in a kiln with limestone to make clinker, a pebble-like material which is then ground with gypsum into cement powder.

European cement makers use more alternative fuels and petcoke than steam coal but in Asia and Africa, coal is the dominant fuel.

Holcim, the world's second-largest cement maker, missed first-quarter profit forecasts on Wednesday, citing high raw material and energy costs, particularly the higher cost of coal for its Indian plants [ID:nLDE7420AT].

Lafarge on Thursday reported a 5 percent fall in current operating profit to 224 million euros in the first quarter. [ID:nLDE7$$05X].

INDIA, CHINA LEAD DEMAND

"It's difficult to generalise, even in Europe because some countries have fared worse than others but we think it's beginning to bottom-out, starting to improve now," said a source at one of the biggest cement makers.

"Producers with a large number of Indian plants or plants in China are more exposed to coal because the main fuel is coal rather than petcoke," he said.

"Reluctantly, we have had to accept that there is no reason we can see for coal and petcoke prices to fall from current levels," he said.

Alternative fuels include a variety of waste products which would go into landfill, dried sewage and oil car tyres which can be burnt in sealed units.

Benchmark European and South African physical coal prices surged from $90.00 a tonne in Q4 to nearly $130 on Asian demand and the impact of Australian floods on supply.

Besides temporary falls on currency or oil moves, coal and petcoke prices have quickly rebounded and are set for further gains in the second half of the year.

"After this week's correction in commodity prices I am bullish for the second half, $130 for DES ARA for 2012," said Emmanuel Fages, analyst with Societe Generale in Paris.