High coking coal costs to keep Indian steel prices firm

The rise in seaborne coking coal prices is squeezing margins for Indian steel producers, although downstream prices may find support from seasonal factors.

The Argus premium low-volatile hard coking coal index was $432.35/t cfr India on 21 October, having hit a record peak of $437.75/t on 23 September.

The rise in metallurgical coal costs has come at a time when steel prices have stayed firm. The Argus hot-rolled coil index month-to-date average is 67,625 rupees/t, 2.5pc below the June average that was the highest since at least 2015, according to Argus records. Prices are up by 61pc compared with the October 2020 average and 100pc higher than the October 2019 average.

The market outlook for steel demand is largely bullish on expectations of a seasonal rise in demand and increased Covid-19 vaccinations.

"We expect [steel] prices to retain their upward bias through this quarter," Crisil Research's director Isha Chaudhary said. "With supply disruptions in Australia and logistical issues worldwide, we can see greenflated coking coal prices now keeping steel prices up," she added. Greenflation refers to a rise in prices of metals and minerals with the global push towards renewable technology and lowering emissions.

Seaborne coking coal prices have risen to record levels on firmer Chinese demand, strong global demand elsewhere and tighter seaborne supplies. China's supplies are tight because of curbs on domestic production, partially linked to the country's emissions control goals.

"For coking coal, there is no shortage in terms of mining, but there is a shortage in terms of logistics," Jindal Steel and Power's (JSPL) managing director VR Sharma said. "Prices are up on the criss-cross movement of freight, with India and Europe buying from Australia and China buying from the Americas. This has increased voyage times. Sluggish unloading operations at Chinese ports over the last few months has created a vessel shortage and increased costs," he added.

Australia accounted for 83pc of India's metallurgical coal imports in August and 82pc during January-August. This is higher than the 70pc share seen the last two years for the same period.

Panamax freight rates from east Australia to east coast India are 84pc higher from a year earlier.

India has signed an initial deal with Russia on coking coal co-operation, aiming to bring down costs and diversify supplies. The measure is unlikely to have much impact, with Russia accounting for less than 5pc of India's coking coal imports. The record cfr China prices have also made Russian sellers more focused on the Chinese market. The spread between cfr India and cfr China premium low-volatile prices average $178/t for the month to date.

Cfr India prices were at a premium to cfr China levels in October last year. Indian steel mills usually buy pulverised coal injection grade coal from Russia.

"We expect that the coking coal price impact for third quarter will be higher by about $95 to $100/t," said JSW Steel's commercial and marketing director Jayant Acharya. "The impact of the cost increase is getting reflected gradually in the market, the prices of steel products in India, which were lagging the international price cycle is now going up. In October, we have seen some price increases and going forward in November and December, we see price adjustments going upwards to balance cost increase."

Thermal coal bites secondary steel

A surge in domestic thermal coal consumption, coupled with lower coal supplies has rapidly depleted stocks at India's coal-fired utilities.

The Argus cfr India 5,500 kcal/kg thermal coal index was $212.46/t last week, the highest since Argus data going back to 2014.

Thermal coal shortages have hit secondary producers. Rebar prices in the country have risen by over 40pc from a year earlier.

"The problem of thermal coal shortage was the last nail in the coffin for secondary producers. We were already bleeding with the iron ore issues," said Steel Re-rolling Mills Association's chairman Vivek Adukia.

The lack of supplies from state-controlled producer Coal India is affecting small and medium manufacturers' finances and the ability to buy from other markets as sources are limited, Adukia said. The situation is unlikely to cool off until at least January 2022 and steel prices should further increase, he added.

"The future of steel price is uncertain and keeping inventory at this price is like walking the tightrope," a trader said. "The risk of high power costs and strong ferro-alloys prices will further add to the cost structure, keeping [steel] prices high in the near term," Crisil's Chaudhary added.

"By and large the thermal coal situation is under control, but steel mills and sponge iron plants are not getting the quantity desired by them. I think in the next 10-15 days it will be absolutely under control," JSPL's Sharma said, adding he does not expect steel prices to increase any further as a result of the thermal coal shortages.

By Sumita Layek and Deepali Sharma