Steel companies to feel the heat from surge in coking coal price

Good times for the steel industry, led by the imposition of the minimum import price, anti-dumping and safeguard duties, might be getting over soon, as 40 million tonnes (mt) of steel production will be impacted by the coking coal price surge in the third and fourth quarters.

Since July, coking coal spot prices have increased from $90 a tonne to $245 a tonne and 40 percent of India’s current steel production of 90 mt that uses the blast furnace technology, will be affected. That includes all major players, Tata Steel, SAIL, JSW Steel, Bhushan Steel and Essar Steel, to an extent. Indian Steel Association Secretary General Sanak Mishra pointed out around 60-70 per cent of the industry's coking coal requirements were imported. In the next two to three months, this increase will reflect in steel prices. “This is a serious concern for the industry. Coking coal prices have been moving up since July. Over the next two-three months, this increase will have to be passed on and it will have to be significant each month,” JSW Steel Director for Commercial & Marketing, Jayant Acharya, said. But, prices internationally, too, will have to move up. So far, there has been an increase of $15-20 a tonne.

India’s installed capacity is 116 million but the production during last year was 90 mt. The installed capacity has grown about 19 per cent from 97 mt in FY12 and almost the entire expansion has happened through the blast furnace route. Coking coal accounts for 35-50 per cent of the cost of producing steel with this method. “The cost of steel production for domestic players would increase by around Rs 6,000 per tonne, actual hit would depend on contract vs spot purchase mix,” Jayanta Roy, senior vice-president, ICRA, said. Steel prices, since the imposition of minimum import price, has increased by Rs 6,000, led largely by a recovery in international prices, but the sharp increase in coking prices is now threatening to wipe out the gains. The reason for the price surge is that China, which relies mainly on domestic supply, has started importing coking coal to curb pollution levels, curtailing its own production. Also, there is supply disruption in Australia.

The price surge has led debt-stressed companies like Bhushan Steel to contemplate restarting its direct reduced iron (DRI)-based plant that doesn't use coking coal. Typically, the cost of production in a DRI-based plant is higher by Rs 4,000 a tonne vis-a-vis the blast furnace technology because it is a power-intensive technology. But if the additional cost on account of coking coal is Rs 6,000 a tonne, it might make sense if the surge is going to continue. Demand is another factor that may come in the way of increasing prices significantly. “We will have to see how coking coal prices will impact prices of per tonne of steel. If the steelmakers are unable to absorb the cost, they will have to pass it on to the buyers. So, even after the increase in input cost, if the prices go up, and steelmakers are able to sell at below the anti-dumping duty, they can pass on the increase to customers. The biggest issue is that steel consumption in the country is very low. The demand has to pick up. This will happen once infrastructure spending starts,” Sunil Srivastava, deputy managing director, State Bank of India, said. But till the companies are able to pass on the price to consumers, margins will be under pressure. The increase in earnings before interest, taxes, depreciation, and amortisation levels after the imposition of MIP-led lenders to appropriate 5-15 per cent from each sale proceeds for at least part-interest realisation.