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Fall in coking coal prices to help steel companies

Indian steel makers are set to benefit from a sharp fall in coking coal prices but the gain is likely to be limited as steel prices have also begun to slide in the global markets, according to metal analysts.

Coking coal, a key ingredient in steelmaking, has tumbled 16% in the quarter to June over the previous quarter, according to rating agency ICRA, because of lower demand from China and higher supply.

It is now hovering close to $100 (about Rs 6,000) per tonne. Analysts say lower coking coal pries will reduce input costs of Indian steel producers, who import significant quantities of the commodity.

The biggest beneficiary will be JSW Steel, which imports all its coking coal requirement, followed by Steel Authority of IndiaBSE -0.77 % (SAIL), which imports about 70% of its requirement.

Another big beneficiary will be Tata SteelBSE -1.53 %, which imports half of the coking coal it needs.

A $10 drop in coking coal prices leads Rs 500 in earnings to a benefit of an average before interest, tax, depreciation and amortisation (EBITDA) per tonne of steel sold, if everything else remains the same, said Giriraj Daga, an analyst with Nirmal Bang.

However, the impact on margins is likely to be limited as global steel prices have started falling accordingly.

This is already hurting Indian steel producers. Analysts say had steel prices remained steady in global markets, Indian producers could have seen their EBITDA climb Rs 400-800 per tonne.

Tata Steel's EBITDA was Rs 15,529 per tonne in the first quarter of 2014-15, while that JSW SteelBSE -0.90 % was Rs 8,500. SAIL's EBITDA was Rs 4,101 per tonne in the same period.

"Lower coking coal prices are beneficial but steel prices have also started coming under pressure globally .Therefore, overall the impact of margins may not be significant. It all depends on steel price trajectory ," said Abhisar Jain, metals analyst at Centrum Broking.

While coking coal prices are falling due to oversupply and weak demand, steel prices are unable to hold on to the prices due to the same reason. Experts do not expect coking coal prices to fall further.

"Interna tional coking coal prices have already corrected significantly. While in near-term, further decline can't be ruled out, in medium-term horizon, it is unlikely to fall significantly more," said Jayanta Roy , senior VC and co-head, corporate sector ratings at ICRA.

Source: The Economic Times