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"We expect the domestic players producing steel through the blast furnace route to benefit from the continuing weakness in international coking coal prices, a trend which has already been observed in the financial results posted by a number of companies in the first quarter of 2014-15," it said.
Coking coal prices have declined around 16% in the first quarter of 2014-15 (Q1FY15) over the previous quarter, and the same contract prices have been rolled over in Q2FY15. This followed a 13% decline in coking coal prices over the whole of FY'14. "With the exchange rate remaining largely stable in FY'15 till date, the price decline has provided a relief to the blast furnace operators in the country, which import coking coal for producing steel," ICRA Senior Vice-President and Co-Head (Corporate Sector Ratings) Jayanta Roy said.
Domestic iron ore production, however, continues to suffer in spite of the lifting of bans from mines in Karnataka and Goa. The continuing short supply situation in the country has been further aggravated by the recent closure of iron ore mines in Odisha, although temporarily.
While some of the mines, which were initially under the purview of this ban, have been allowed to commence operation subsequently, production is yet to resume at the other merchant mines, which had accounted for around 15-20 million tonnes of iron ore production in FY14 in the state.
Iron ore royalty benign
Earlier last week Fitch Ratings had said that the increase in India's iron ore royalty rates is not likely to have a major impact on the profitability of steel producers in the country, rating agency Fitch Ratings had said.
"We do not expect an increase in India's iron ore royalty rates to have a major impact on the profitability of steel producers in the country. Under the proposal approved by the Indian government, the royalty rate on iron ore will be increased to 15% from 10%," Fitch Ratings said in a statement.
The government has not yet said when the increase will be implemented. The higher royalty rates will raise the input costs of Indian steel producers by $2-5 per tonne of steel produced, depending on the type and grade of iron ore used. Fitch expects iron ore mining companies in India, which largely supply domestic users, to be able to pass on the increase given tight supply domestically, raising the input costs for both integrated and non-integrated steel producers.
It said steel producers are likely to be able to pass on their higher costs to consumers because of a likely improvement in steel demand in India. As a result, the higher royalty is unlikely to have a major impact on Indian steel producers' profit margins. Fitch expects steel demand growth to start to improve from the second half of FY15, supported by a pick-up in consumption following rising consumer sentiments and an expected improvement in economic growth.
The improving consumer sentiment is reflected in passenger vehicle sales data compiled by the Society of Indian Automobile Manufacturers - sales volumes during June and July 2014 rose from a year earlier, compared with a six% fall in FY14.
Steel demand in India was weak during FY14 with consumption rising by just 0.6% to 73.9 million tonnes, according to data from Joint Plant Committee, a government body that collects data on the iron and steel industry.
This was due to slow growth in the key steel consuming industries of automobiles, infrastructure, construction and engineering. Iron ore exporters, who already pay high export duties on their shipments, will face slimmer profit margins following the increase in royalty. Iron ore exports other than pellets, already attract export duty of 30%. India largely exports lower grade iron ore fines. The additional costs while global iron ore prices remain weak will significantly impact the competitiveness of iron ore exports from the country.
