Slide in Coking Coal Prices Calms Indian Steel Makers

The impact of the Debbie cyclonic storm in Australia has subsided. The cyclone ripping into the coal territory of the largest producer had spawned concerns over supplies. The tropical storm hit the key coal lines cutting off supplies to other countries. Interruption in coal supplies escalated spot prices of premium hard coking coal to a record high of USD314 a tonne, the highest since the second quarter of 2011.What’s more, the contracted prices also shot up to USD330 per tonne as steel makers were forced to seek coal shipments from faraway nations like Canada when their stockpiles reached perilously low levels. Price spike was also the fall out of flooding in Queensland. Steel companies from Japan, China and India took to buying the key ingredient from spot markets.

But, the worries on coal despatches by Australia are petering out. Negotiations to set quarterly coking coal prices that Japan’s steel companies will pay to the  miners have resumed. The talks would fix the benchmark prices of coking coal to be paid to miners in Australia, the largest exporter.

On hindsight, it can be said the impact of Australia’s tropical storm was overplayed. Coking coal trade has entered the bear territory with prices softening to USD170 a tonne. The global market is now awash with supplies as end users have taken to the first wave of restocking in April 2017. Buyers are not hoping to liquidate their coking coal stock unless the price settles at pre-Debbie level. Anticipating that the impact of the cyclone would last longer than what it turned out to be, some end users bought too much of the steel making material. That in itself has left ample room for a further correction in coking coal prices. In fact, before the supply disruption in Australia, Japan’s steel mills were looking to clinch a quarterly price of USD150 per tonne. A forecast by Wood Mackenzie corroborates this, saying the coking coal price could tumble to the production break even of USD150 per tonne.

The descending coking coal prices are a pointer to flagging demand in China, the largest consumer. As the Chinese stimulus fades, new car sales are receding- its real estate industry is also losing steam. A combination of the two factors is contributing to the downturn in demand and exerting downward pressure on coking coal prices.

Coking coal price fall together with weakening iron ore prices are a double whammy for the Indian steel companies. The time is opportune to go for quarterly and long-term coking coal sourcing arrangements though market volatility has to be priced in. India’s steel makers are heavily into coking coal imports. Pricier coking coal has hurt their margins for most part of FY17.

Higher coking coal and iron ore prices were set to take the sheen off the Q4 earnings for all the leading steel companies. Despite a sequential improvement in realization of USD 23 – USD31 /tonne, Elara Capital expects operating income of steel manufacturers to be hit on the back of higher coal costs. Over the last few years, steel-makers have been sourcing raw materials based on index prices. The long-term contracts have been replaced with index-based prices, which are often impacted by speculation and events like cyclones.But, the recent slump in prices is an opportunity for the steel firms to shore up margins and consolidate their expansion goals.

A report by S&P Global Platts says India is poised to become the second biggest steel producing country in the world after China over the next 12-18 months, as steelmakers continue adding capacities in anticipation of upcoming demand.

This production increase is despite the slow pace of current steel consumption in the country, it said.India’s overall finished steel output over April-January in FY17 was only 82.87 million tonne, about 68 per cent of installed steel capacity of 122 million tonne per annum.The Indian government has drafted a new steel policy to raise the country’s steel production capacity to 300 million tonne by 2030-2032. Previously, this target was set for a time period of 2025. A number of private and state-owned mills have almost doubled their steelmaking capacities over the past five years, informed the report. The front runner was India’s largest steelmaker, state-owned Steel Authority of India (SAIL), which increased crude steel production capacity to 20 million tonne per year from the previous 13 million. The National Steel Policy aims at creating self sufficiency in steel production, encouraging adequate capacity additions, developing globally competitive steel manufacturing capabilities, enhancing domestic steel demand, facilitating foreign investment and asset acquisition of raw materials.

Signs of the domestic steel industry gaining competitive edge in exports are palpable. India’s steel exports rose 78 per cent to 6.6 million tonnes, while imports fell by 39 per cent between April 2016 and February 2017, making India a net exporter of steel for the first time in four years, according to the Indian Steel Association. The domestic steel output grew 11 per cent to 92 million tonnes and consumption grew 3.4 per cent to 76.2 million tonnes during the same period.

During 2015-16, India imported 11.7 million tonnes as it was flooded with cheap supplies from China, the biggest steel producer and exporter. The World Steel Association has projected India’s steel demand to grow by 5.7 per cent in 2017 against the flat global rate of 0.5 per cent and a deceleration by 2 percent in China.

Source : Steel 360 June’17 Issue