The recent rally in coking coal prices, as a result of higher demand from China amid subdued supply, might entirely offset the price gains by the domestic steel sector in the last quarter of the current financial year, rating agency ICRA on Wednesday said.
“While domestic steel prices have also witnessed an improvement owing to protection measures introduced since February 2016, the recent rally in coking coal prices is likely to almost entirely offset the price gains in Q4 FY17, assuming no change in hot rolled coil, iron ore and coking coal prices from the current levels,” it said in a report.
International contract prices of benchmark low-volatile premium hard coking coal (HCC) for the October-December period of 2016 have been settled at $200/mt, showing a 116% Quarter-on-Quarter increase from $92.5/mt in the July-September period of the current year.
ICRA said that the increase in the cost of steel production will be around R5,750/mt, which is around 17% of the hot-rolled coil price. The prevailing price of HRC is R33,750 per tonne, up from R25,250 in the first week of February.
Given the inventory-holding period of 70-90 days for imported coking coal for steel mills, the effect of the price increase of coking coal will likely reflect in the profitability of domestic blast furnace players in Q4 FY17, it said.
“Gross contribution levels of domestic blast furnace players in Q4 FY2017 is likely to dip by around R4,000/mt over Q3 FY2017, unless the increased coking coal costs are accompanied by commensurate price hikes by the steel makers,” it said, adding that given the subdued demand scenario domestically, a large price hike in the near term appears doubtful.
The benefits from trade protection measures to domestic blast furnace players will continue till Q3 FY2017. However, in Q4 FY2017, they expect most of the improvements in operating profits over the levels of February 2016 to be offset by rising coking coal costs.
It expects coking coal contract prices in Q1 CY17 to be lower than the highs of Q4 CY16, aided by higher global supplies though the levels of US$90/mt, which were prevailing between Q3 CY15 to Q3 CY16, are unlikely to be re-visited any time soon.
Indian steel firms meet two-thirds of the coking coal from imports. India had imported 43.5 mt coking coal last financial year.
Source : financialexpress.com