Indian steelmakers to raise coking coal consumption

Indian steelmakers are likely to consume more coking coal in 2018, after the country returned to a net exporter of steel and profit margins increased.

But mills need to continue passing on higher coking coal costs to steel buyers if they are to maintain profit margins, something that could become more difficult after China ends its winter curbs on domestic steel production in mid-March.

Indian mills raised steel prices by about 5pc or 2,500-3,000 rupees/t ($39-47/t) in January and are planning a similar increase in February to pass through higher coking coal and iron ore feedstock costs. The price increases are feasible because imports from China are even more expensive.

"Steel prices have improved globally. But Indian mills are not enjoying margins as high as Chinese mills because of their exposure to import feedstock costs," an Indian steelmaker said.

India became a net exporter of steel again in the April 2016 to March 2017 financial year, in part because of government anti-dumping duties on Chinese steel imports. India exported about 8mn t of steel in the period against imports of 7mn t, and domestic capacity increases mean it will remain a net exporter through the 2020-21 fiscal year, according to bank Goldman Sachs.

"India is on track to become the second-largest steel producing country over the next two years, surpassing Japan," Goldman Sachs said. "However, India is one of the lowest per capita steel consumers globally."

Infrastructure construction and government spending in rural areas is expected to maintain steel demand growth in 2018. This could keep domestic production rates high and increase the impact that Indian steelmakers have on the seaborne coking coal spot market.

Indian buyers bought about 7-8 spot cargoes of coking coal or 600,000 t/month last year, compared with about 3.5mn t/month bought by Chinese mills. India only buys 10-20pc of its total imports from the spot market and most of these deals are done on a floating basis, while China buys 80pc of its imports from the spot market mostly on a fixed-price basis.

Coking coal prices could begin eroding margins at Indian steelmakers in the second quarter of 2018 as Chinese mills ramp up production and drive seaborne prices higher.

"The Indian steel market is quite bullish for now, but we have to keep in mind that production restraints in China will end in mid-March and import prices could drop again," an Indian merchant cokemaker said.

But Indian steelmakers will hope these effects are short-lived. Coking coal inventories at Indian mills are likely to rise again in the second half of 2018 as mining firms expand production and find ways to debottleneck operations, as long as the Australian wet season ending in March does not have any lasting impact, Goldman Sachs said.