Weak rupee to make imports costly for metal firms, exports may get a push

A weak rupee will make imports of input materials more expensive for metal firms but better export realisations may cushion the impact to an extent.

Rupee depreciation has a three-way impact on the steel industry – imports of raw materials will become expensive but exports may get a push. Also, steel imports will be less competitive and act as a buffer to weakening domestic prices.

According to CRISIL Research, India imported close to 57-59 million tonnes of coking coal – a key input for steelmaking – worth Rs 1 trillion in fiscal 2022.

Prices of coking coal soared since Russia’s war on Ukraine – in both major steel and raw material exporting countries. It has come off from peak levels of $670 a tonne, but is still high, hovering around $500 a tonne. A weak rupee will make imports more expensive but some steel companies believe that the impact will be neutralised.  

“A weaker rupee is positive for the steel industry as we are a net exporter of steel. Domestic prices will be helped with a weaker rupee because imports will be less competitive. Imported coal costs will go up but overall a weaker rupee is better for the industry,” said Tata Steel managing director and chief executive officer, T V Narendran.

“While the rupee has depreciated, we at JSW Steel have a cash flow hedge in place,” said Jayant Acharya, director (commercial & marketing), JSW Steel.

Acharya also said that a weaker rupee will lead to higher cost of imports and thus support domestic prices. “Exports will provide some cushion on better rupee realisation. As geopolitical tensions and supply disruptions ease, we expect a correction in raw material prices going forward.”

Jindal Steel & Power expects the higher cost of coal imports to be neutralised by export realisations. “We are exporting about 35 per cent of the total produce and we import only coking coal. The impact on us is neutral up to rupee at 78-levels,” said JSPL Managing Director V R Sharma.

The problem for steel firms, however, is that prices in the western markets have corrected as pointed out by Hetal Gandhi, Director, CRISIL Research.

“Indian mills made the best use of elevated prices in Europe and the US to book export orders over the last two months – but with prices in both the geographies correcting by over 25 per cent – exports will not remain as lucrative. Hence, Indian mills won’t be able to use exports to offset the rise in coking coal prices,” said Gandhi. 

In the domestic market, prices are correcting after touching a new all-time high in April.

SteelMint data shows that the average monthly trade prices of hot rolled coil (HRC) – a benchmark for flat steel – dropped from Rs 76,000 in April to Rs 72,500 per tonne in May; rebar in long steel corrected from Rs 72,900 to Rs 71,000 per tonne.

ArcelorMittal Nippon Steel India chief marketing officer, Ranjan Dhar, said that there was hardly any headroom for mills because costs in this quarter were very high. To the extent of currency movement, costs will get impacted.

Dhar pointed out that the bulk of sales is in the domestic market. “About 70-80 per cent of the cost is on account of imported coal. That cost will go up because of currency while domestic steel prices is not moving basis currency,” he said.

But mills are hoping that sentiments will correct out of China. Covid restrictions in China have impacted demand and softened steel spreads and relaxation of lockdown is expected to bring back demand.

In base metals, India is a net exporter of zinc and may stand to gain. “Our prices are linked with USD. While fall of rupee does improve earnings in INR, it increases our cost of imported coal as well as capital equipment and certain spares. However, on overall margin point of view, it’s beneficial,” said Arun Misra, CEO of Hindustan Zinc. The company has a 78 per cent market share in India’s primary zinc industry.

As far as aluminium is concerned, India is a major exporter. Gandhi said, three large domestic players export over 60 per cent of its domestic production. “Rise in currency rate is likely to lead to higher realizations (domestic as well as exports) aiding the margins for the players.”

However, S K Roongta, non-executive chairman, Balco, explained rupee will not have a great deal of impact on the aluminium industry. “There are inputs that have to be imported. Secondly, in a normal situation, if the dollar is strong globally then prices on the London Metal Exchange (LME) get correspondingly adjusted downward.”  

The secondary aluminium sector is largely dependent on imports, said Gandhi, and depreciation in rupee will lead to higher input costs, which will be marginally offset by higher domestic realisation.

However, a secondary steel producer said that raw material prices had corrected, which was a positive.

In copper, Indian manufacturers are largely converters and depreciation in rupee will lead to higher treatment charge/refining charge margins – fixed at a global level between miners and copper cathode manufacturers –  in rupee terms, proving beneficial for the industry, according to Gandhi. 

WEAK RUPEE - PROS and CONS

Steel

Imported coal cost to increase

Steel imports to be less competitive

Export realisations to increase

Aluminium

High cost of imports; higher export realisations but LME prices off peak levels 

Zinc

Input cost to increase; weak rupee to improve earnings as India is a net exporter

Copper

Weak rupee to lead to higher treatment charge/refining charge margins