Hard coking coal prices to hit steel margins

Stiff coking coal prices will continue to exert pressure on steel makers' profit margins over the next two quarters. The decline in iron ore prices in recent weeks is unlikely to provide any respite, analysts said.

Coking coal is a key ingredient for making steel. Indian steel makers such as SAIL and Tata Steel rely on imports to meet their requirement. Each tonne of steel produced requires almost a tonne of coking coal, mainly imported from Australia.

Supply shortage

Steel makers paid as high as $330 a tonne for coking coal in the quarter-ended June, as prices shot up in the aftermath of the Australian floods early this year that choked the supplies. However, the shortage in supplies could aggravate further if the ongoing strike at BHP Billiton, the world's largest producer of coking coal, continues further.

The benchmark coking coal contracts for September quarter were recently negotiated at $315 a tonne, marginally lower than the previous quarter.

“There is hardly any change in coking coal prices over previous quarter,” said Mr H.M. Nerurkar, CEO of Tata Steel. The company relies on imports to meet half of its requirement.

Margin contraction

Mr Bhavesh Chauhan, analyst at Angel Broking expects the operating margins of various steel firms to contract by 300 to 370 basis points year-on-year in the June quarter. This margin contraction, mainly due to the high raw material costs, is despite the expected rise in sales and higher realisations during the quarter.

“The impact of higher raw materials will be felt in the first two quarters,” he said.

Operating profit margins of steel companies have seen a sequential decline in major part of the last financial year. “The squeeze in margins will be worse in the July-August-September quarter,” said Mr Bikash Bhalotia, an analyst with Pinc Research. The recent decline in iron ore prices is unlikely to provide any relief, he added.

Lower demand

Iron ore prices in the recent weeks have declined by 10-15 per cent in the domestic market and are hovering at around Rs 6,000 a tonne.

Weakening of demand from sectors such as automobile, consumer durables and to an extent even from the construction sector amidst rising interest rates could compound the woes for the steel makers, analysts said.

Besides, the steel makers would not be able to pass on this cost burden to consumers in a weak market. Steel prices have largely remained steady in the Indian market in the June quarter. A slowing demand could result in inventory pile up in the near-term, thereby keeping prices under check.

However, Mr Chauhan said the second half of the current financial year could be better on volume pick due to better demand post-monsoons. Further, the coking coal prices are expected to ease in the second half, but the pace would depend on how operations in Australia normalise and supplies are restored.

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