Coal price hike to impact secondary steel makers, says Icra
The recent hike in coal price and railway freight rate hikes is expected to increase the cost of steel production by Rs150-500/MT for a secondary steel producer, Icra says
New Delhi: The hike in prices of coal by state-run Coal India Limited (CIL) is likely to make producing steel for secondary steel players costly by up to Rs500, says a report.
The increase followed an additional levy on evacuation facility charges (EFC), of Rs50 per tonne, from 20 December, credit rating agency Icra said on Monday. “The recent hike in coal price and railway freight rate hikes, following the earlier levy of EFC, is expected to increase the cost of steel production by Rs150-500/MT for a secondary steel producer using sponge iron and induction/ electric arc furnaces for steel-making, and dependant on domestic coal,” the report said.
On 9 January, CIL hiked thermal coal prices for both power and non-power consumers with immediate effect, a decision which electricity producers said would jack up energy prices by up to Rs0.50 per unit. The company has hiked prices of non-coking coal which will raise average coal price by about 8.5%, CIL chairman Gopal Singh had told PTI.
The quantum of impact would however depend on the grade of coal used in the sponge iron kiln and captive power plant. This is due to the fact that the level of coal price increase implemented by CIL for the non-regulated sector is uneven across various grades.
Senior vice president and group head (corporate ratings) at Icra, Jayanta Roy said: “The cumulative effect of this recent increase in raw material and freight costs would negatively impact the operating margins for secondary steel producers by 45-145 basis points at current price levels, unless such mills are able to pass-on this cost increase to consumers.”
It also said that for the higher calorific value G7–G9 grades, which are typically used in the sponge iron kiln, the price increase including duties and taxes ranges from Rs58 per tonne for the G9 grade, to Rs468 for the G7 grade. For the lower calorific value G10–G12 grades, which are typically used in captive power generation, the price increase ranges from Rs58/MT for the G10 grade, to Rs210/MT for the G11 grade.
Icra further said the steel players are also expected to experience an increase in inward freight costs on account of the rate revision by the Indian Railways for movement of coal and coke, the effective rate of increase has been around 4% over the prevailing rates across various distance slabs. “...unless secondary players are able to pass-on this cost increase through steel price hikes, operating margins for such mills are expected to decline between 45-145 basis points at current price levels,” it added.
Editor's Picks »
- Jet Privilege can actually get higher valuation than Jet Airways
- Profitability of cement firms to take a hit due to weak prices, high costs
- Pidilite’s shares hold their ground despite weak rupee and rising crude
- Automobile sector shares trip on rising risks to earnings growth
- Steel companies are taking a shine to their home market