Coking coal prices are being negotiated at $200 per tonne, a 55% increase over the last year, while iron ore prices are likely to rise 40%.
These dramatic raw material cost increases are set to benefit local integrated steelmakers as increasing steel prices would only expand their margins.
Analysts said that Steel Authority of India (SAIL) and Tata Steel India will gain from the cost push while JSW Steel, too, is expected to benefit because of its product mix.
Pawan Burde, vice-president (research), Pinc Research, said, “Tata Steel India and SAIL will benefit as steel prices are expected to go up by $60-70 per tonne. However, due to their iron ore and coking coal integration, cost push for Tata Steel India comes to $23 per tonne and around $55 per tonne for SAIL.”
Another analyst who wished not to be quoted said, “Steel prices in India move in tandem with the international prices and as most of international steelmakers have no raw material integration, any price increase will benefit SAIL and Tata Steel India.”
The analyst, however, said as Corus, Tata Steel’s UK subsidiary, is completely dependent on market for its raw material requirements, Tata Steel’s consolidated earnings might be under pressure.
He said, “Steel prices are expected to go up by $100 per tonne or so…In that case Tata Steel and SAIL will benefit as their cost push won’t be that much.”
Indian steelmakers are largely integrated players with SAIL and Tata Steel sourcing all their ore requirements from captive mines. JSW Steel has 20% iron ore integration and buys the rest from NMDC. Smaller players such as Ispat Industries and Essar Steel source all their ore from NMDC.
JSW Steel needs 5.5 million tonne of coking coal this year as it has raised its steel capacity from 4.8 million tonne to 7.8 million tonne. The company imported 4.5 million tonne of coking coal in 2009-10. SAIL is currently importing 70% of its coking coal needs and sources it from BHP. Tata Steel imports around 50% coking coal, while Corus buys its entire requirement from the market.
Bhaskar N Basu of Bank of America-Merrill Lynch, in a report on Tuesday wrote, “We expect SAIL’s FY11 expected Ebitda per tonne to expand 20% and FY11 earnings per share to grow 24% led by higher prices and 100% iron ore integration. It lacks coking coal integration, but higher prices should more than compensate for coking coal cost hike.”
Basu said, “Our global team’s base case estimate of 50% hike in iron ore costs and 40% hike in coking coal costs implies an increase in steel making raw material cost of around $95 per tonne (46% year on year).”
B Muthuraman, vice-chairman, Tata Steel, told Reuters he expected iron prices to rise 35% this year, which will put pressure on profit margins.
“I don’t know where it’s (iron ore prices) going to settle, but it does look 25-35% higher. Steel prices may not go up by that much. This means steel companies will come under margin pressure,” he said.
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