May face up to $100 a tonne pressure due to likely rise in coke, ore prices.
Indian steel producers such as Tata Steel, JSW Steel and Steel Authority of India (SAIL) may have to see their cost per tonne rise by around $100 (Rs 4,500) due to the rising price of coking coal and iron ore.
The new contracts for raw materials set in from April 1. The extent of pressure on a company would depend on its backward integration on raw materials.
Annual negotiations are under way between steel producers and raw material suppliers to fix the contracts for coking coal and iron ore. Recently, BHP Billiton, the world’s largest coking coal exporter, won a 55 per cent price increase from Japan-based JFE Holdings’ steel unit in the first three-month contract ever signed for coking coal. The contract was fixed at $200 a tonne (Rs 9,100) for three months, up from the annual contract of $129 (Rs 5870). The top three Indian steel producers would jointly need 25.5 million tonnes of coking coal in 2010-11, half of which will need to be imported.
Similarly, China’s demand for steel is driving iron ore consumption and the latter’s price may soar 60 per cent this year as the global economy recovers and steel consumption gains, said Morgan Stanley, the global investment bank, in a report early this month. This would raise Indian iron ore prices to $96 a tonne (Rs 4,368) from $60 a tonne (Rs 2,730) now.
“It will be very difficult to pass on the full impact of the raw material cost rise,” said Seshagiri Rao, director, finance, JSW Steel. His company, India’s third largest producer, imports all its coking coal requirement. For 2010-11, it requires 5.5 mt to meet the demands of its increased production, up from 4.5 mt required in 2009-10. It also buys about 80 per cent of its iron ore requirements from Indian producers.
One tonne of steel requires 0.8 tonne of coking coal and about 1.6 tonnes of ore. So, a $71 per tonne rise in coking coal price (as with the earlier, Billiton, instance) would have an impact of $56 increase in per tonne cost of steel making. Similarly, a $36 per-tonne rise in the iron ore price (as in the earlier, Morgan Stanley report) would result in a $57.6 rise in the per-tonne cost of steel making. Together, it would result in a $114 increase in the per-tonne cost of steel making.
“The ebitda (earnings before interest, tax, depreciation and amortisation) of the companies would be impacted to the extent producers are not able to pass on the rising raw material cost,” said Rao. JSW Steel reported $154 ebitda a tonne (Rs 7,007) for the quarter ending December 31.
This prompted JSW Steel to promptly look for acquisition of coking coal mines abroad. The company earlier said it planned to meet up to half its coal requirements through its own mines and was looking for acquisitions in countries such as Australia, the US, Canada, Russia or Mongolia. The company is expected to produce 6.8 mt of steel in the next financial year, up from 5.9 mt estimated this year. Tata Steel, India’s largest producer, reported $287 of ebitda per tonne of Rs 13,059 for the last quarter, while its European subsidiary, Corus, reported $38 of ebitda a tonne (Rs 1,729). Tata Steel imports only 30 per cent of coking coal requirements, while Corus buys its entire coal from the market.
Tata Steel’s production is expected to touch 6.5 mt in the next financial, up from estimated 6.1 mt in 2009-10. This would increase the company’s dependence on outside coal. For iron ore, Tata Steel has captive mines but Corus fully depends on outside purchase.
“For Tata Steel, the impact would largely be on Corus, as it would be difficult to pass on the full impact of the cost rise in Europe, where demand is under pressure,” said Giriraj Daga, an analyst with Mumbai-based brokerage Khandwala Securities. “The India operations of Tata Steel and SAIL are largely capable of withstanding the cost impact due to their relatively high level of backward integration in comparison to JSW Steel.”
In case of SAIL, 70 per cent of the coking coal requirement is sourced from outside India. But, it has captive mines for iron ore. The company is expected to produce 12.8 mt of steel in the next financial year, up from 12.2 mt in 2009-10.
Early this month, steel prices rose by Rs 500 to Rs 600 a tonne as the government partially rolled back the excise duty cut on non-petroleum products to 10 per cent from 8 per cent. The price of steel products increased as the companies passed on the rise in excise. They now await the contract settlements to consider the next price rise. According to Bloomberg data, the benchmark hot rolled coil steel is currently priced at Rs 37,000 a tonne, inclusive of duty and four per cent value added tax.
