Steel companies to feel the heat as raw material prices rise

9 November 2016

Some of the benefits to Indian steel producers from restrictions on steel imports may disappear due to the rising prices of key raw materials -coking coal, iron ore and other. Coking coal prices have risen 170% in the past three months and iron ore prices by 25%.

Shares of Indian steel producers such as Tata Steel, JSW Steel and SAIL, which have rallied strongly since the introduction of minimum import prices (MIP) in February 2016, may come under pressure.These stocks have fallen by 5-10% from their recent highs.Hard coking coal prices per tonne have increased from $100 to $270 in the past three months. Iron ore prices in the international market rose from $50 to $65 and by 15-20% in India in two categories -fine and lump.

According to estimates, this may increase the cost per tonne of steel by around Rs 7,000, which may reflect with lag, partially in the December quarter and fully in the March quarter as the contracts are mainly on quarterly basis. This cost inflation is around 15% of the current steel prices and the steel companies may not be able to pass it on, which means margins will be impacted.

According to steel traders that ET spoke with, at higher prices, the pos sibility of lower steel off-take is high.Steel prices have increased by around Rs 2,700-3,000 in the past three months and the volumes have dropped marginally since then.

Amongst the top Indian steel producers Tata Steel has 35% captive coking coal, SAIL has 5% and JSW Steel has none. Tata Steel and SAIL have 100% captive iron ore while JSW Steel sources its coal mainly from NMDC and international markets. It means Tata Steel and SAIL will only be impacted by the rise in coking coal prices while JSW Steel will face the cost pressure due to price increase in both -coking coal and iron ore.