Coking coal price rise likely to delay margin recovery of steelmakers

Rising coking coal prices — a key raw material — may be a spoiler in the margin recovery of steelmakers. After peak levels in April, coking coal was on a downward trend.

But prices of hard coking coal FOB Australia have increased by around 58 per cent from July-end. This may add to the concerns around margins.

“High costs in the current quarter with over-corrected steel prices have contracted margins. Raw material prices have come off their peaks and costs will come down and margins should be better in Q3. But in the last 2-3 weeks, coking coal prices have again moved up. This may impact costs and needs to be watched,” said Jayant Acharya, deputy managing director (deputy MD), JSW Steel.

Ranjan Dhar, chief marketing officer (CMO), ArcelorMittal Nippon Steel India (AM/NS India), pointed out that steel mills would be carrying a high cost of inventory in Q3. This is one of the key concerns that would put pressure on the already-squeezed margins.

“The conflict between Russia and Ukraine triggered raw material prices to soar, amid muted demand. There was also concern around availability.

So, the world over and also in India, mills purchased a higher quantity of raw materials than they normally do.”

Globally, steel prices corrected sharply after touching record highs in April on the back of a drop in raw material prices and weak sentiment.

Hetal Gandhi, director, CRISIL Research, pointed out that China was facing a demand slowdown on account of localised lockdowns under the zero-Covid policy and a struggling real estate sector.

The domestic market has also seen a sharp correction in steel prices from peak levels.

According to a Kotak Institutional Equities report, prices of hot rolled coil (HRC) — a benchmark for flat steel — was down 3 per cent in the past one month. Over a three-month time period, it was lower by 20 per cent.

But the high cost of raw material inventory may prevent a further correction in steel prices.

“Q2 will not see another round of sharp corrections. There is still headroom for prices to fall, but mills will be utilising raw material inventory procured at a higher price, preventing a significant fall in prices,” said Gandhi.

Also, domestic demand is reasonably good. Gandhi said that July 2022 had already seen a 12-13 per cent year-on-year (YoY) growth in finished steel demand, but much of it can be attributed to a low-base in FY22.

But Jatin Damania, vice-president of fundamental research, Kotak Securities, said, “Margin recovery appears delusional in H2 based on spot spreads. This is due to consumption lag as we see downside risks to prices and upside risks to costs.”

“We believe the peak of steel margin is behind and we expect margins to remain under pressure,” added Damania.

The industry is also facing an overhang of steel inventory as exports dropped sharply since the imposition of export duty.

A recent Motilal Oswal report said that total inventory accumulation in India was 0.55 million tonnes (mt), according to a Joint Plant Committee (JPC) report for July 2022.

It said, “We believe the inventory position as reported by JPC will undergo an upward revision in August 2022. This comes as all large mills have accumulated over 2 mt among them.”

But there are tailwinds. Acharya believes post-European holidays, the demand is likely to be better.

He said, “After the Chinese announcement of support to various sectors and falling inventories, there should be improvement in the demand going into the next quarter.”

In addition, focus on energy transition to renewable energy and hydrogen is getting fast tracked in many countries. This will consume large quantities of steel, Acharya added.

“Capacity utilisation has also dropped globally, keeping steel production flat,” Dhar pointed out.

Any further uptick in coking coal prices will lead to margin correction for the industry. Gandhi believes that given a healthy demand, players are likely to pass on the rise in input costs. 

The headwind, however, is the recessionary sentiment across major global economies.