Rising coking coal prices could limit margin recovery of steelmakers in H2

Mumbai: The rising prices of coking coal, a key input for steel manufacturing, may limit the margin recovery of steelmakers who have given a guidance for better margins in the latter half of this financial year after a tough first two quarters.

Prices of coking coal, which is largely imported, have reached almost $300 per tonne (CNF Paradip) after hitting a low of around $210 in the first week of August, according to data from SteelMint. CNF stands for cost and freight, indicating the landed price of coking coal at the Paradip port inclusive of freight cost.

Every $100 rise in coking coal prices per tonne results in approximately a $70-80 cost increase per tonne of steel for primary steelmakers. Steel mills use coking coal to produce refined iron from ore, which is then further used for making steel.

Leading steelmakers like Tata Steel indicated at the April-June quarter earnings calls that their margins, which had come under pressure, would further deteriorate in the ongoing July-September quarter before improving in the latter half of the year. They attributed the margin recovery in the latter half, in part, to the declining prices of coking coal which subsided from a peak of over $600 a tonne in March to $210 a tonne in August.

There is usually a lag of two months between a change in the price of coal and its subsequent impact on margins given the time involved in transporting the fuel and the stocking of inventory.

Looking at present prices of coking coal, which will be consumed sometime in November by Indian mills, if they book coal now, steelmakers can expect a margin recovery of $80-90 per tonne during the October-December compared to the ongoing quarter purely from lower coal prices, according to Jayanta Roy, senior vice-president and group head for corporate sector ratings at ICRA.

However, this assumes an average coal price of around $275 prevailing in the next two months. If coal prices continue their northward march, the margin recovery will be narrower than estimated, Roy said.

Coking coal prices are going up because Australia is looking at a third consecutive wet summer season in the last quarter of the current year as indicated by the latest La Nina forecasts, said Hetal Gandhi, director at CRISIL Research.

“This is expected to impact the production of coking coal and its evacuation from mine to port. Following the release of the forecast, traders have started procuring and stocking coking coal, fearing upward movement in the near- future,” she said.

Major listed steel companies that use coking coal include Tata Steel, JSW Steel, Jindal Steel and Power, and Steel Authority of India.