Steel sector faces December chill on costly coal

Benefit of higher realisation to get nullified as coking coal prices shoot

Steel producers will see their margins shrink sequentially in the December quarter as input costs move up.

The companies will have deal with coking coal prices more than doubling from $100 per tonne in early 2016,.

“Steel companies have raised prices during the quarter and realisations will be higher, but this will be nullified by higher input costs,” said Abhisar Jain, senior analyst with Centrum Brokerage.

Coking coal, a key raw material, is largely imported by steel companies like JSW Steel, Jindal Steel & Power and Bhushan Steel.

“For JSW Steel, we expect the steel business EBITDA/tonne of Rs 6,315, down 18 per cent, quarter on quarter," said the Centrum report.

Analysts said the high coal cost would affect Tata Steel more in the March quarter because of its quarterly contracts. “EBITDA/tonne at domestic operations of Tata Steel is expected to be higher by 7 per cent sequentially at Rs 7,819, led by higher realisations,” the Centrum report added.

Brokerages were divided on the effect of demonetisation on steel sales. “Steel companies could take a volume hit of about 5-7 per cent on account of demonetisation,” said Giriraj Daga, portfolio manager at Visaria Securities.

“November is in the peak demand season, but this year retail sales have not been to expectations,” Nitin Johari, director (finance), Bhushan Steel had said. “Demonetisation could be a factor because consumers and retailers usually deal in cash. Automobile companies are expected to go on a longer shutdown of 20 days due to demonetisation,” he added.

Most steel players were organised and might not be affected by demonetisation, said an analyst with Motilal Oswal.

Earnings of steel companies during the December quarter are seen higher than in the corresponding period of the previous year when India was subject to dumping. Though consumption has not picked up significantly, higher exports and a fall in imports were positives in the December quarter.

“Global steel prices have jumped to $450 per tonne, placing steel companies in a better position to raise prices,” said Jain. “There will be further hikes in prices in coming months as the cost of coking coal has not been passed on entirely,” Daga added.