 "ArcelorMittal tempers steel's recovery hopes")
Ideally, steel mills that take the blast furnace route should maintain coking coal inventory of at least two months, lest they should be visited by events like the devastating floods triggered by La Nina in 2010-11 in Queensland.
Well nothing like that has happened in Australia or in any other major metallurgical coal production centre. More than China exercising production discipline at its mines in a drive to cut coking and non-coking coal mining by 500 million tonnes in the next five years and contain flat steel output in other countries, it’s speculation that has driven the price of the fuel from $93 a tonne in June 2015, the lowest since 2004, to over $300 a tonne now.
Much to the concern of the steel industry, which started believing that it had overcome the worst of times wreaked by high global capacity and big Chinese exports, coking coal is fast approaching the high of $330 a tonne seen five years ago.
Galloping coking coal prices has caught steelmakers by surprise. They, having used up the inventory, must now start working in an environment of much higher raw material costs. ArcelorMittal Chief Financial Officer Aditya Mittal admits to being taken aback by the “rapid and unexpected rise” in coal prices, which he hopes will be reflected in steel prices. But as there is always a time lag in that happening, industry margins will come under pressure — in the next few months at least.
Dampening outlook
Luxembourg-based ArcelorMittal, which is by far the world’s largest steelmaker with production footprint in all the continents (mostly independently and also by way of joint ventures), will have its profitability crimped in the final quarter of 2016 by a combination of “lower steel prices in the US and impact of rapidly rising coal prices on steel spreads in other geographies.”
The company is expected to use around 35 million tonnes of coking coal in 2016 and another 9 million tonnes of non-coking coal across its mills in different geographies, while its own production of the fuel is expected at six to seven million tonnes.
Coking coal is a major cost component in the blast furnace route of steel production since around 700 kg of the fuel is required to make one tonne of crude steel. There is no running away from the headwinds caused by the surge in raw material prices compounded by likely steel consumption growth of a meagre 0.5 per cent in 2016.
In the US, a market of strategic importance for ArcelorMittal, steel demand and prices have of late been impaired by stagnation in the manufacturing sector and falling machinery demand linked particularly to the continuing weakness in the energy sector.
Both for the size of its operation — ArcelorMittal’s crude steel production in 2015 at 92.5 million tonnes was more than India’s cumulative production of 89.58 million tonnes — and big investment in research to be able to introduce a series of advanced high strength products, specially for the automotive sector to fend off emerging competition from aluminium and composites, the company is globally seen as the bellwether for the grey metal.
Widespread impact
The changed supply and price paradigm for coal is set to take the shine off the working of ArcelorMittal in the current quarter and perhaps beyond. If the company of this stature could make a forward looking statement to this effect, then the negative impact of the changed price environment will become the common experience for the industry everywhere.
Let’s take Steel Authority of India Limited (SAIL) as a representative case. When PK Singh was appointed chairman of SAIL in December 2015, one of his two principal tasks was to turn around the country’s largest steelmaker which made a loss of Rs 4,137 crore in 2015-16. (The other was to complete the investment of Rs 72,000 crore in the modernisation and expansion of SAIL mills and mines.) Now, the reason that will make ArcelorMittal trip could also postpone SAIL’s return to profit.
ArcelorMittal’s third-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.9 billion marked a 40.4 per cent rise over the corresponding quarter of the previous year when both steel and mining were in the dumps. Steel-only EBITDA had a quarter-on-quarter improvement of 5.3 per cent to $1.7 billion, helped by 7.4 per cent rise in average prices but offset to some extent by a dip in shipments.
Mining EBITDA, up 25 per cent over the second quarter, could have been still better but for lower iron ore marketable shipments. Though nothing compared to metallurgical coal, iron ore has also moved up well from a 10-year low of $37 a tonne in December 2015 to $80 a tonne.
While not contesting the claim of ArcelorMittal Chairman Lakshmi Mittal that the “results reflect the progress the company is making to improve the underlying performance,” steel prices improving by over 40 per cent since the beginning of this year, even though coking coal is becoming a point of concern, came to the rescue of the steel industry.
Steel price improvement of this order can be largely attributed to China providing stimulus to infrastructure and housing development in order to stabilise gross domestic product growth at about 6.7 per cent. There was a 27 per cent surge in new building construction in China between January and October and house prices are up 16 per cent over the past year.
The global steel market is drawing some relief that unlike last year, the demand will not shrink in 2016. Instead, according to ArcelorMittal, world steel usage growth should be 0.5 per cent and China too can register identical consumption growth.
The industry, including ArcelorMittal, speaks in one voice that sustainability of steelmakers’ health depends on how quickly the world gets rid of an estimated 600 million tonnes of surplus capacity, half of which is in China, and the resolve of countries to stamp out unfairly priced steel exports, whatever the origin.
