Malini Bhupta Moneycontrol News
A sharp uptick in raw material costs and poor pricing power in the March quarter is likely to dent the financial performance of listed steel-makers. Steel production grew in double digits for many companies during the quarter and realisations improved, but profitability will suffer due a tripling in prices of coking coal to USD 160/tonne in March 2017 from USD 50/tonne a year earlier. According to Essar Steel, input costs have been rising in the last two quarters without any corresponding increase in selling prices as steel companies are unable to pass on the increase to their customers.
Despite a sequential improvement in realization of Rs 1,500-2,000/tonne, Elara Capital expects operating income of steel manufacturers to be hit on the back of higher coal costs. The brokerage expects JSW Steel to be affected the most as it has been hit with both higher coal cost (up by Rs 3,400/tonne) and iron ore cost (up by Rs 200-250/tonne) in Q4.
EBITDA/tonne is expected to go down 26 percent quarter-on-quarter to Rs 5,708. Centrum, too, has a negative stance on the ferrous metals space. EBITDA/tonne is expected to remain muted due to increase in coking coal costs, which cancels out the benefits of the price increase. Volumes remained strong for large steel-makers thanks to strong export sales but this would be negated by higher costs. Tata Steel is expected to be least impacted as it imports only 67 percent of its coking coal requirements and has better backward integration than others.
Over the last few years, steel-makers have been sourcing raw materials based on index prices. The long-term contracts have been replaced with index-based prices, which are often impacted by speculation and events like cyclones. This increases volatility. Many steel-makers in India have been struggling to source coking coal and iron ore over the last few years as supplies have been disrupted for a variety of reasons. Prices of both raw materials in the March quarter have spiked even though steel demand has grown at a modest 3.5 percent in FY17.
Coking coal prices in the fourth quarter of FY17 averaged USD 80/tonne against USD 52/tonne a year earlier. India's steel industry is largely dependent on coking coal imports, supplies of which were disrupted when cyclone Debbie hit Australia towards the end of March 2017 and prices spiked to USD 160-180/tonne.
Madan Sabnavis, Chief Economist of CARE Ratings, said in a note: "The steel companies in India do import coking coal from Australia. Thus, the sharp rise in prices will increase the cost pressure for producers, in turn, leading to a rise in steel prices."
According to Seshagiri Rao, Joint Managing Director and Group CFO of JSW Steel, "Iron ore prices were at USD 40/tonne in January 2016 and they were at USD 90/tonne a couple of weeks ago. There is no reason iron ore prices should go up so sharply since demand has not gone up." Iron ore prices have corrected since then to below USD 70/tonne.
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