Steel turns dearer as cok­ing coal price surges

MA­JOR FLAT-STEEL PRO­DUC­ERS HAVE IN­CREASED PRICES BY RS 1,500/ TONNE; IM­PACT MAY BE SEEN IN FOURTH QUAR­TER

Resource Digest - - RESOURCE DIGEST -

Ma­jor flat-steel pro­duc­ers have in­creased prices by Rs 1,500 a tonne on the back of a surge in cok­ing coal prices. Since July, spot cok­ing coal prices have in­creased from $90 a tonne to $279 a tonne. Cok­ing coal con­tracts for the fourth quar­ter of 2016 have been sealed at $200 a tonne, an in­crease of 116% over the third quar­ter. Cok­ing coal ac­counts for 30-50% of the cost of pro­duc­tion for steel mak­ers that use the blast fur­nace tech­nol­ogy.

Around 44% of In­dia’s steel pro­duc­tion of 90 mil­lion tonnes uses the blast fur­nace tech­nol­ogy, an in­dus­try rep­re­sen­ta­tive said. This would in­clude ma­jor play­ers such as Tata Steel, SAIL, JSW Steel, Bhushan Steel and Es­sar Steel.

ICRA has es­ti­mated that do­mes­tic blast fur­nace play­ers de­pen­dent on im­ported cok­ing coal would see a cost in­crease of Rs 5,750 a tonne of steel pro­duced. This works out to 17% the price of hot rolled coil (HRC), a bench­mark prod­uct for flat steel used by the au­to­mo­biles and white goods sec­tors. Around 60-70% of In­dia's cok­ing coal re­quire­ments are im­ported.

The pri­mary rea­son for the in­crease in cok­ing coal prices was a curb in do­mes­tic pro­duc­tion by China, which has prompted it to im­port coal. The Chi­nese gov­ern­ment has set a tar­get of re­duc­ing ca­pac­ity by 500 mil­lion tonnes in the next five years. Plus, there have been sup­ply is­sues from Aus­tralia.

“The ben­e­fits from trade pro­tec­tion mea­sures, which helped in the re­cov­ery in HRC prices by Rs 8,500 a tonne be­tween Fe­bru­ary and Oc­to­ber of CY2016, are likely to largely dis­ap­pear after the end of Q3 FY2017,” a re­cent ICRA re­port said. “Gross con­tri­bu­tion levels of do­mes­tic blast fur­nace play­ers in Q4 FY2017 is likely to dip by around Rs 4,000 a tonne over Q3 FY2017 un­less the in­creased cok­ing coal costs are ac­com­pa­nies by com­men­su­rate price hikes by the steel mak­ers.”

Steel pro­duc­ers are not hope­ful of pass­ing the en­tire in­crease in cok­ing coal to con­sumers be­cause of muted de­mand. “The in­crease in prices has been an­nounced but to what ex­tent it can be re­alised is un­cer­tain,” a sec­ondary pro­ducer said.

Most of the im­pact of in­crease in cok­ing coal prices is likely to be felt in the fourth quar­ter, as the in­ven­tory hold­ing pe­riod for im­ported cok­ing coal for steel com­pa­nies is 70-90 days.

Not so long ago, HRC prices were hov­er­ing around $250 a tonne, a steel pro­ducer pointed out. It’s now at around $450 a tonne. Cheap im­ports from China, South Korea and Ja­pan had put the in­dus­try in dire straits, not just in In­dia, but glob­ally. This had led to a stress in the bank­ing sec­tor, too. The sit­u­a­tion had prompted the In­dian gov­ern­ment to come out with a slew of trade mea­sures — safe­guard duty, min­i­mum im­port price and anti-dump­ing duty — to sup­port the in­dus­try.

The In­dian Steel Al­liance, a pro­duc­ers' body, has now made a rep­re­sen­ta­tion to the gov­ern­ment that no anti-dump­ing duty should be im­posed on met­coke, a by-prod­uct of cok­ing coal. In De­cem­ber 2015, the min­istry of com­merce had ini­ti­ated an anti-dump­ing in­ves­ti­ga­tion into low-ash met­coke from Aus­tralia and China.

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