Nifty Metal index slips 4%; SAIL, Tata Steel, Hindustan Copper dip up to 6%

An increase in coking coal prices would not augur well financially for steel companies' in India, ICICI Securities said in a note

Shares of metal companies were under pressure at the bourses on Monday with the Nifty Metal index plunging more than 4 per cent on media reports that China is considering allowing some stranded Australian coal cargoes amid ban on coal imports from Australia.

At 11:29 am, Nifty Metal index, the top loser among sectoral indices, was down 4.2 per cent, as compared to 0.93 per cent decline in the Nifty50 index. Steel Authority of India (SAIL) and Hindustan Copper slipped 6 per cent each, while Tata Steel, Jindal Steel and Power, Hindalco and JSW Steel were down in the range of 4 per cent to 5 per cent on the National Stock Exchange (NSE).

The shipments that could be cleared are those that arrived before a ban on Australian coal went into effect, the Bloomberg report quoted a person familiar with the situation. "Deliberations are at an initial stage and any decision would need the approval of more senior Chinese leaders, the person said. The broader prohibition on Australian coal remains in place, and ideally the cargoes would be resold to buyers in other countries," the person was quoted as saying.

Most of the stranded coal is the type used to make steel, while a smaller portion is used for power generation.

“On account of China's restriction on import of coal from Australia, during the last 3 months, coking coal prices have remained stable around $100-110.However, in the previous week, coking coal price in Australia increased by 17 per cent to US$130/tonne. An increase in coking coal prices would not augur well financially for steel companies’ in India’s as it would increase the cost of production for companies using the blast furnace route,” ICICI Securities said in a note.

“While the coking coal prices have remained subdued due to restrictions on the imports of coal in China with Australia origin, leaving the coal market significantly oversupplied, we witnessed continued hike in steel prices, driving domestic EBITDA/t to record highs across the board,” analysts at Emkay Global Financial Services said in metals & mining sector update.

The slowdown in stimulus in China; any sort of regulation on domestic steel prices; removal of ban on coal imports in China (Australia origin); and contraction in demand in China are the key risks we see through FY21/22E that can disrupt the ongoing party, the brokerage firm said in recent report.