Coking coal price spurt to pare profitability of steel makers

Mumbai : The operating margin of primary steelmakers will reduce by a third to 24-26 per cent in the second half of this fiscal, versus the first half as input cost soars owing to over two time rise in coking coal prices since July.
However, for the full fiscal, the operating margin will average a robust 31-32 per cent, a good 400 basis points (bps) higher than in last fiscal, due to a strong first half that saw healthy steel prices and moderate input costs.
The consequent robust accruals will support increased capital expenditure, continued deleveraging and strengthening of balance sheets, a Crisil study of the top five steelmakers, which account for 58 per cent of domestic production, shows.
Global coking coal prices have rallied strongly since July, rising from $175 per tonne in June to $400 per tonne in October, mainly due to disruptions in the Australian and Chinese mines, and logistical issues such as freight and container unavailability, amid healthy demand from global steel producers, especially ex-China.
The prices are expected to ease only gradually as supply takes time to ramp up. Given that domestic primary steelproducers rely mainly on imported coking coal, their production costs will rise sharply.
In contrast, iron ore, the other key raw material that accounts for 15-20 per cent of the cost of production, is entirely met from domestic sources (captive plus merchant supplies). Although global iron ore prices have fallen 60 per cent between July and October, domestic prices have fallen only 30 per cent as supply continues to be tight.