Steel, cement firms staring at bleak April-June quarter on Australian floods

The economic hubbub in and around Queensland has come to a standstill after a major flood inundated the second-biggest state in Australia.

The development in Queensland, which thrives on tourism and mining, will not only lead to a tumbling of Australia’s revenue graph, but also affect India which imports over 25 million tonnes of coking coal from the region.

Experts say steel and cement companies could take a major hit in terms of higher raw material prices, margin squeeze and higher production cost. The impact could have a prolonged effect for at least two quarters.

“Forty vessels are idle on the Queensland coast, with not even an ounce of coal available to be loaded and dispatched,” said Amar Bhasin, vice-president, Hindustan Global Resources, an exploration, development and consulting firm based in Australia.

He said most of the railroads in Queensland have been washed away with no option to transport the coal. Six coal terminals with a capacity of over 200,000 tonnes are lying vacant as massive rains and floods have poured into 40 mines, Bhasin said.

“Even when the water subsides, it will take at least six months to rebuild the infrastructure and make it up and running,” he said.

Analyst Rashi Chopra and team from Citi Global Markets, in a January 10 report, said, “If damage to the Queensland rail system is substantial, quarterly coking coal contract prices could move beyond $300 per tonne.”

The price hike will have an impact on margins of all the major Indian steel companies if they are not able to pass it on as they have hardly any captive coking coal.

“Indian companies import close to 35 million tonnes per annum of coking coal, majority from Australia. Therefore, the impact will depend on the extent of integration of steel companies in India,” said Bikash Balotia, a metals analyst with brokerage Pinc
Research.

Companies such as SAIL and JSW Steel will definitely see a squeeze in margins if they do not pass on the costs. The immediate impact will be a rise in the coking coal prices for the April-June quarter and will have a cascading effect on not only in higher cost of production but also as a rise in steel prices globally, Balotia said.

He anticipates the prices of coking coal, which are already high, will jump another 8-10%.

A JSW Steel source said the company will not see any impact as it had made prior arrangements due to a flood situation in Australia but experts say on a long-term basis, every importing company will take a hit.

JSW Steel imports all its coking coal requirement.

While the price of coking coal for the December quarter was $209 per tonne, for the March quarter it is $225 per tonne.

A January 2011 report by Crisil Research said that spot prices of coking coal will increase by 19% from the fourth quarter of 2010 level, touching $280-290 per tonne in the first quarter (January-March) of 2011. However, after that it will average at $250-260 per tonne in 2011.

However, an increase in the spot prices will have an impact on fresh contract prices of $260-270 per tonne for the April-June 2011 quarter, which will affect the profitability of steel firms. “We expect the profitability of non-integrated steel players to decline by 400-500 bps quarter on quarter during April-June 2011,” it said.

Also, cement companies which, too, require coking coal are experiencing some cost push.

“For cement companies, coking coal contributes around 10-12% of the total cost. The shortage of both coking coal and thermal coal supplies from Australia has led to a global demand-supply mismatch, resulting in a rise in prices,” said Amit Srivastava, research analyst, Karvy Stock Broking.

Thermal coal prices have shot up by around 20% alone in the past one month. The global thermal coal prices are currently at $128 per tonne, he said.

Rupesh Sankhe, research analyst with Angel Broking, said, “For cement companies, the overall energy price has shot up from $107-110 per tonne in October-December quarter to $130-135 per tonne at present owing to weather problems in Indonesia and Australia.”