 "Steel firms hike prices by Rs 3,000 per tonne")
Steel companies have increased prices by up to Rs 3,000 a tonne effective December, on the back of a surge in coking coal prices. International contract prices of premium hard coking coal for the third quarter of FY17 have been settled at $200 a tonne, an increase of 116 per cent, quarter-on-quarter. Moreover, spot prices have increased from $90 a tonne in July to $315 a tonne.
According to ICRA, due to this doubling of contract coking coal prices, the cost of steel production for domestic blast furnace players will increase by Rs 5,750 in the fourth quarter over the third quarter of FY17.
“As a result, the benefits from trade protection measures, which helped hot-rolled coil (HRC) prices recover after February 2016, are likely to disappear after the end of Q3 2017,” said Jayanta Roy, senior vice-president and head (corporate ratings) at ICRA.
Trade measures over the past year had prompted domestic hot-rolled coil prices to move up from Rs 29,250 a tonne in July to Rs 33,750 a tonne. That gain is now threatened by the cost push.
According to ICRA's estimates, however, gross contribution levels of domestic blast furnace players in the fourth quarter of FY17 are likely to dip by around Rs 4,000 a tonne from the third quarter of FY17 levels, unless the increased coking coal costs are accompanied by commensurate price hikes by steel makers.
Around 40 per cent of India's current steel production of 90 million tonnes uses the blast furnace technology. That includes all major players, Tata Steel, SAIL, JSW Steel, Bhushan Steel and Essar Steel. Industry representatives, are however, sceptical whether sales will actually happen at the increased prices. “There is no demand at the retail level or in the rural markets. Sales are 10 per cent of what they normally are on account of demonetisation. Last month, too, prices had increased but towards the end of the month, significant rebates were given,” said a producer.
Small house builders account for a major chunk of rural sales and it is completely cash-based. “Given that a majority of the small-to medium-sized secondary steel players in India are positioned in the long product segment, the impact of this slowdown in real estate demand is expected to affect their capacity utilisation levels,” said Roy.
Products closer to the end consumer are the ones affected by demonetisation. In the flat product category, the impact of the slowdown would be felt in demand for corrugated sheets and galvanised sheets.
Given the demand outlook, ICRA believes that steelmakers will only be able to partially pass on cost increases, which in turn, would put pressure on operating profiting margins in the fourth quarter of FY17. Additionally, due to the leveraged balance sheets of many large steel companies, the debt protection metrics of the industry are expected to remain depressed in the near term, said ICRA.
