Hike in coal prices likely to impact secondary steel makers, says Icra

The hike in prices of coal by state-run CIL is likely to make producing steel for secondary steel players costly by up to Rs 500, says a report.

The increase followed an additional levy on evacuation facility charges (EFC), of Rs 50 per tonne, from December 20, credit rating agency Icra said today.

"The recent hike in coal price and railway freight rate hikes, following the earlier levy of EFC, is expected to increase the cost of steel production by Rs 150-500/MT for a secondary steel producer using sponge iron and induction/ electric arc furnaces for steel-making, and dependant on domestic coal," the report said.

On January 9, Coal India Ltd (CIL) hiked thermal coal prices for both power and non-power consumers with immediate effect, a decision which electricity producers said would jack up energy prices by up to Rs 0.50 per unit.

The company has hiked prices of non-coking coal which will raise average coal price by about 8.5 per cent, CIL chairman Gopal Singh had told PTI.

The quantum of impact would however depend on the grade of coal used in the sponge iron kiln and captive power plant. This is due to the fact that the level of coal price increase implemented by CIL for the non-regulated sector is uneven across various grades.

Senior VP and Group Head - Corporate Ratings at Icra, Jayanta Roy said: "The cumulative effect of this recent increase in raw material and freight costs would negatively impact the operating margins for secondary steel producers by 45-145 basis points at current price levels, unless such mills are able to pass-on this cost increase to consumers."

It also said that for the higher calorific value G7G9 grades, which are typically used in the sponge iron kiln, the price increase including duties and taxes ranges from Rs 58 per tonne for the G9 grade, to Rs 468 for the G7 grade.

For the lower calorific value G10G12 grades, which are typically used in captive power generation, the price increase ranges from Rs 58/MT for the G10 grade, to Rs 210/MT for the G11 grade.

Icra further said the steel players are also expected to experience an increase in inward freight costs on account of the rate revision by the Indian Railways for movement of coal and coke, the effective rate of increase has been around 4 per cent over the prevailing rates across various distance slabs.

"...unless secondary players are able to pass-on this cost increase through steel price hikes, operating margins for such mills are expected to decline between 45-145 basis points at current price levels," it added.