Here’s when the demand for finished steel will rise

Published: September 27, 2016 6:05 AM

It is quite likely that demand for non-coking coal from thermal power plants as well as from the sponge iron units is going to rise at a faster pace once the investment scenario improves significantly in the second half of the current fiscal.

It is ironical that when steel market is projected to grow at a faster pace than what it was in the previous few months, the raw material scenario is throwing a spanner. Against the quarterly prices of prime coking coal settled for July-September 2016 quarter at $91.5/t fob Australia, the spot prices currently are hovering at $210-212/t, 130% increase within two months. It is reported that the spot prices quoted prior to the negotiation of the prices for the third quarter are speculative and this is the handiwork of the future indices of coal quoted by different sources. The underlying reasons behind the increase namely, environmental regulations on coal mines at China, massive floods inundating some of the mines there, logistic bottlenecks faced by miners in Australia in transportation along with mines suspending operations due to floods and closure of US coal mines are not simply adequate to justify the jump. Meanwhile, the Japanese mills are yet to conclude the negotiations for the third quarter to be followed by India, while China mostly opting for spot purchases.

Mozambique-sourced coking coal with its high freight cost may match the current spot price, but it should rather be left as a last option by India which should await the traditional supply flow from Australia. Meanwhile, all out efforts must be made to reduce the quantum of imports by maximising washing with indigenous coal.

Coal India is reportedly investing good sums for enhancing capacities of the washeries where imported coking coal with 7-8% ash may be blended and washed with domestic coal to get an output of 14-16% ash. It is quite likely that demand for non-coking coal from thermal power plants as well as from the sponge iron units is going to rise at a faster pace once the investment scenario improves significantly in the second half of the current fiscal.

With respect of coking coal, the requirements from the primary mills like SAIL, RINL and JSW would be higher with more output expected from the mills under expansion of the existing steel plants. As imported prices are settled at a price higher than the second quarter one, it may prompt CIL to seek a higher compensation also. All this depends on the behaviour of the steel market from October onwards.

Compared to coal, the prices of iron ore are stabilising at $55-60/t CFR China, after increasing by $15-20/t during the past four months. The domestic prices of Chinese concentrates with 66% Fe dry with 17% VAT are ruling at $56/t which may be lower than the cost of the economic operations for the local iron ore producers in China as almost the entire production of concentrates need to be beneficiated before these are used by the steel plants in China.

The current prices of iron ore provides reasonable margin of operations to Australian and Brazilian plants. It is not so for all these periods for coking coal in 2015 and H1 of 2016 except for the last one month and hence there is every possibility that coking coal prices would be settled for prices higher than $91.5/t FOB Australia in the third quarter as demand from China and India would continue to rise in the coming months and supply gap in coal is to take some more time to fill up.

This brings back the plausible price scenario of steel prices in the third quarter in which steel prices on the back of higher raw material costs are bound to rise globally as well as in India. The level of increase would be largely determined by demand push. In the third and fourth quarters of the current fiscal, apart from the traditional push up factors, the additional liquidity available to the middle class and the anticipated benefits to the business community due to the activation of GST from April 2017 and the marginal recovery in real estate and consumer durable segments would contribute to perking up of demand for finished steel. With imports of HR and CR capped under anti-dumping duty, the price hike would have been higher but for additional flat products being made available from Tata/Kalinganagar, SAIL/RSP, JSW and Essar Steel in third and fourth quarters.

The author, Sushmin Banerjee, is DG, Institute of Steel Growth and Development. Views expressed are personal.

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