Weak demand amidst rising cost is likely to hit domestic steel companies. Most large steel producers are now focusing on export markets to overcome the challenging times.
The international contract price for coking coal has more than doubled to $200 a tonne in the December quarter.
The spot coking coal price has been increased to $309 a tonne from $213 a tonne logged in October.
Jayanta Roy, Senior Vice-President, ICRA, said the rise in coking coal prices will push domestic steel companies cost by around ₹5,750 a tonne in March quarter.
The trade protection measure by way of safeguard duty and minimum import price will disappear, he said.
The domestic steel demand has remained stagnant in the June quarter, with consumption growing by just 0.4 per cent.
Slowdown in realty However, demand improved since July, pushing Q2 consumption by 6.8 per cent.
However, going forward, an anticipated slowdown in the real estate sector on account of the Government’s demonetisation drive will impact demand of long steel players in the immediate term.
Given that a majority of the small to medium-sized secondary steel players in India are positioned in the long product segment, the impact of this slowdown in real estate demand is expected to affect their capacity utilisation levels, Roy added.
In the flat products used by automobile and white goods sector, the impact of the slowdown would be limited.
Domestic hot-rolled coil prices witnessed an uptrend since the imposition of anti-dumping duties in August and increased by 15 per cent to ₹33,750 a tonne in November.
It was at around ₹29,250 a tonne in July. In the backdrop of an unabated rise in coking coal price, as well as a resilient Chinese steel demand, international HRC prices have rallied from $328 a tonne in June to $475 a tonne in November.
As a result, with domestic HRC prices now being cheaper than imported offers by about $40 a tonne.
This leaves some headroom to domestic steel companies to pass on the cost increase coming from higher coking coal costs.
Nonetheless, given the muted demand outlook in the near term post demonetisation, ICRA believes that steelmakers will only be able to partially pass on such cost increases, in turn, putting pressure on their operating profit margins in Q4 FY2017.
Additionally, due to the leveraged balance sheets of many large steel companies, the debt protection metrics of the industry are expected to remain depressed in the near term, it said.