Steel turns dearer as coking coal price surges

7 November 2016

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.

Steel turns dearer as coking coal price surges
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.