Steel sector revival likely after April

Spot prices of premium hard coking coal have come off a high of $310 in Nov to $222 a tonne

Iron ore prices are retreating, coking coal has come off its highs and international steel prices are elevated, the future looks bright for the steel industry, but the good times are likely only in the next financial year.

Spot prices of premium hard coking coal, one of the key inputs for steel, have come off a high of $310 in November to $222 a tonne. But contract prices for the fourth quarter are still high at $285 a tonne. 

Experts tracking iron ore are forecasting a slide in 2017 to around $52 a tonne. At present, global prices are $80 a tonne, down by about 9%. 

Together, coking coal and iron ore account for 75% of the input cost for steel.

"It all depends on the spot versus contract mix of companies importing coking coal. But most of the impact of higher coking coal is likely to kick in during the fourth quarter. Companies with captive raw material will stand to benefit from higher steel prices on their entire output," explained Jayanta Roy, senior vice-president, ICRA. 

SAIL and Tata Steel are the major producers with captive raw material.

An ICRA report in December said due to doubling of contract coking coal prices, the cost of steel production for domestic blast furnace players would increase in the fourth quarter of 2016-17. 

Around 40% of India's 90 million tonne steel production uses the blast furnace technology. That includes all major players, Tata Steel, SAIL, JSW Steel, Bhushan Steel and Essar Steel.

Over December and January, however, companies have been able to pass on a total increase of Rs 5,000 a tonne to customers.

The third quarter of 2016-17 is expected to be flat for producers while the fourth quarter could be worse for those on contract coking coal.

But the industry is looking beyond the fourth quarter. The focus is on the consumption pattern. 

Sunil Srivastava, deputy managing director, State Bank of India, said the overall reduction in raw material prices was favourable for the industry. "As soon as the investment cycle starts, the demand for steel is going to go up and prices will climb,” he said.

Globally, hot rolled coil prices have increased from $475 a tonne to $530-550 a tonne since October. Essar Steel's executive director of strategy and business development, Vikram Amin, said, "Prices in China are up and there is no propensity to export. There is a firmness in demand and the road ahead is clear."

But for the debt-stressed sector, this could still translate into little. "Although some recovery is possible, we cannot say everything will be alright soon. Steel companies are not out of the woods yet," said R K Takkar, managing director and chief executive officer of UCO Bank.