Steel price hikes to push coking coal cost

The hike in raw material prices prompted major steel companies to increase prices in April after two successive months of hikes.

JSW Steel, ArcelorMittal Nippon Steel India, and Jindal Steel & Power (JSPL) are among the top private sector steelmakers that have increased the prices of hot-rolled coil (HRC) a benchmark for flat steel by Rs.4,000-5,000 per tonne.

JSW Steel and JSPL, which are into long products, have increased rebar prices by Rs.2,250-3,000 per tonne, respectively.

Domestic steel demand is expected to remain firm with a higher outlay on infrastructure and the price outlook is supported by the strength in international prices. Price hikes have partly offset the cost-push from coking coal. Tata Steel and JSPL would be partly insulated from coking coal costs due to captive coking coal supply from the mines.

Coking coal prices that had gone up to $670 per tonne have come off their highs in the past few weeks. Moreover, other raw materials continued to be at high prices. Also, iron ore, the other key input material, was on an uptrend. NMDC also increased prices in April by up to Rs.200 per tonne.

Domestic steel HRC spot prices have improved to levels of Rs.78,800 per tonne after weakening in January'22 and are at par with Chinese import parity prices. Long rebar prices in the spot market have rebounded to about 8% over the past week to Rs.73,500 per tonne with improved construction activities and higher thermal and coking coal costs. Domestic steel consumption in FY22 at 105.4MT jumped 11% YoY partly aided by the low base last year. Indian steel exports increased 25% YoY to 13.5MT in FY22, as against 10.8MT in FY21 driven by the withdrawal of Chinese export rebates of 13% & imposition of a 15% export duty by the Russian Government in CY21.

Steel prices started increasing in February and scaled to record levels. In the last month, flat steel prices have increased by Rs.10,000 a tonne. However, there could be some relief for MSMEs.

Chinese export HRC prices have recovered to $860 per tonne aided by supply concerns and cost-push from elevated iron ore and coking coal costs. Post Chinese New year, Chinese domestic steel prices have recovered to $838 per tonne aided by expectations of interest rate cuts and economic stimulus measures despite the short-term demand impact due to the covid-19 disruptions. Spot Chinese EBITDA spreads have contracted sharply due to the increase in iron ore costs and elevated coking coal prices. China's steel exports over Jan-Feb'22 declined by 19% YoY to 8.2MT against 10.1MT.

International iron ore prices continue to move up and are currently at about $ 160 per tonne; while spot coking coal prices have dropped to $ 385 per tonne from record highs of about $ 670 in March'22. Tata Steel would be relatively insulated with 20-25% captive coking coal at the domestic operations. JSPL would be less impacted with DRI constituting 30% of hot metal capacity (utilizing thermal coal) and natural hedge from the company's coal mines in Australia and Mozambique. JSPL has recently been declared the preferred bidder for Utkal B1/B2 and Gare Palma IV/6 thermal coal blocks which would enhance raw material security for the Angul expansion. 

Strength in steel prices has enabled de-leveraging at a rapid pace. Net debt to EBITDA for Tata Steel is expected to decline to 1.2 times at the end of FY23 from 6.3 times in FY20 and SAIL's net debt to EBITDA is expected to decline to 1.5 times from 5.6 times in FY20. JSPL's net debt to EBITDA is forecast to decline to 0.9 times in FY23 from 4.6 times in FY20 and the company is targeting to be net cash positive in FY23.