The softening trend in coking coal prices may only provide temporary respite to Indian steel makers such as SAIL and JSW Steel.
A depreciating rupee coupled with restricted ability to raise product prices in a relatively weak demand environment would continue to weigh on profit margins of these firms, analysts said.
Coking coal prices, which ruled at a high of $330 a tonne in the January-March quarter, have eased to around $280 a tonne in the July-September quarter. This is on account of improved supplies from Australian coking coal mines in Queensland, which were hit by flash floods late last year.
Coking coal factor
The Indian steel industry, which is currently negotiating contracts for the October-December quarter, expects coking coal prices to soften a bit further in the coming quarters.
“The dip in coking coal prices will definitely cut production costs and ease the pressure on margins. However, it may not help much as steel companies do not have the pricing power in a weak demand scenario,” said Mr Ravindra Deshpande, analyst at Elara Capital.
High coking coal prices in the past three quarters have dented the profitability of Indian steel makers, who depend on imports to a large extent to meet their requirement.
Rupee factor
On Thursday, the SAIL Chairman, Mr C.S. Verma, said steel prices would firm up from the current levels on improving demand in the post-monsoon scenario. Steel prices have relatively stayed firm despite subdued demand in recent months.
“Margins will improve as we don't expect a decline in steel prices. However, that will be offset by the weak rupee that has depreciated significantly,” said Mr Bhavesh Chavan, analyst at Angel Broking Ltd. The rupee, which has depreciated by over eight per cent since the beginning of September till date, would make the imports of inputs such as coking coal costlier.