India: Cost pressure to weigh on steel producers due to strong coking coal prices

• Domestic iron ore prices drop over 40% since Jan'21
  
  
• Imported coking coal prices rise nearly 120% during same period
  
  
• Steel prices may rise on buoyant raw materials price outlook
  
  

The cost curve of Indian steel producers, especially the primary mills, has edged up over the past two years, as per raw material pricing data maintained with SteelMint. While domestic iron ore prices have decreased in the period from January 2021-November 2022 by over 40%, import prices of hard, low-ash Australian premium coking coal have increased by more than 120% during the same period.

It deserves mention that around 85% of the coking coal requirement of Indian steel manufacturers is met through imports, a large part of it from Australia.

Australian premium coking coal prices climbed to over $300/t CNF India in November this year from $135/t CNF in January 2021 - an increase of 122%. However, domestic iron ore prices - SteelMint's Fe 62% Odisha fines index - plunged nearly 42% during the period from INR 6,038/t exw in January 2021 to INR 3,550/t in November this year.

Iron ore price scenario

The domestic iron ore market witnessed a period of relative supply tightness post the Odisha auctions in 2020 due to delay in operationalisation of production from the auctioned leases. Global steel demand outpaced supply following the abatement of pandemic cases worldwide during March-July 2021, and steel raw materials prices remained firm due to steel exports from India hitting record levels. Domestic iron ore prices went over INR 9,000/t in June-July 2021.

It should be mentioned that domestic supplies, too, recovered in 2021 after operationalisation of auctioned iron ore leases, and supply abundance pressured domestic prices lower.

Lower steel production in China in H2CY21 impacted the iron ore market, although domestic post-festive steel demand kept sentiments largely supported. Prices began to rally globally with the outbreak of the Russia-Ukraine war due largely to panic-stricken steel purchases globally, although prices started edging down in the domestic market after the export tariff of 50% was imposed on iron ore (across grades) and a 45% duty on pellet exports in late-May this year.

Prices stabilised somewhat from June-July 2022 onwards, due largely to higher domestic steel production. With the withdrawal of export duty, prices have a considerable upside going forward.

Coking coal price dynamics

Global coking coal prices, surprisingly, have been going very strong despite the world's leading steel producer, China, putting an informal ban on Australian coal purchases since October 2020. The China vacuum seems to have been filled by Indian importers of Australian coking coal, with domestic steel capacity expansion having gathered steam.

One interesting fact is that coking coal prices received a boost from August-September 2021 onwards due to the sharp rise in thermal coal prices and supply deficit, particularly in China and India. The rally in prices through to May 2022 was due to the Russia-Ukraine war breaking out and natural gas supply scarcity in the EU, in particular, having a direct bearing on coal prices worldwide.

It must be mentioned that having risen to record levels of over $650/t in the early part of 2022, coking coal prices have decelerated due to depressed steel production outlook in China and the rest of the world, due mainly to economic recession, inflation, and consequent erosion of demand.

Imported coking coal prices usually constitute around 40% of the cost of steel production by the domestic mills; however, during periods of price surge - such as when prices hit over $650/t - production costs on account of coking coal of Indian integrated steel producers jump to around 60% of overall costs, SteelMint learnt from sources.

In fact, met coal prices still remain firm in comparison with January 2021 at least, as inclement weather patterns in Australia threaten to weigh on supplies, thereby supporting prices.

The Australian government's Resources & Energy Quarterly predicts coking coal prices to average at $230/t by 2024, down from $377/t in 2022. On balance, it is expected that supply disruptions will continue through the end of the La Nina pattern, with prices holding up briefly but falling from the March quarter 2023. Indian demand has risen recently, and is expected to remain strong unless prices rise rapidly. Chinese demand remains difficult to predict, presenting a sizeable uncertainty for prices.

Outlook

Margins of domestic steel producers, therefore, are likely to remain tight, SteelMint understands, as coking coal prices are unlikely to edge down below $230-240/t levels in the near term. At the same time, domestic iron ore prices are expected to edge higher on account of higher steel production demand as well as higher export opportunities in the coming time.

However, domestic steel prices, too, have an upside due mainly to the bullish raw material price outlook.

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