As for impact of increase in coal prices, ICRA says the quantum of cost increase for a secondary steel producer would depend on the grade of coal used in the sponge iron kiln and captive power plant.
NEW DELHI: The hike in prices of coal by state-run CIL is likely to make producing steel for secondary steel players costly by up to Rs.500, says a report. The increase followed an additional levy on evacuation facility charges (EFC), of Rs.50 per tonne, from December 20, credit rating agency ICRA said today.
Effective January 9, 2018, Coal India Limited (CIL) has increased the prices of thermal coal. This increase for domestic coal consumers comes on the back of an additional levy towards ‘Evacuation Facility Charges’ (EFC) of Rs.50 per metric tonne (MT), which started from December 20, 2017. Moreover, the Indian Railways has increased effective freight rates for coal and coke by around 4% (for all distance slabs) with effect from January 15.
According to an ICRA report, 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 Rs.150-500/MT for a secondary steel producer using sponge iron and induction/electric arc furnaces for steelmaking, and defendant on domestic coal. The quantum of increase would however depend on the specific grades of coal used by the steelmaker.
Jayanta Roy, Senior Vice President and Group Head-Corporate Ratings, ICRA 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”.
As for impact of increase in coal prices, ICRA says the quantum of cost increase for a secondary steel producer would 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. 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 Rs.58/MT for the G9 grade, to Rs468/MT 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 Rs.58/MT for the G10 grade, to Rs210/MT for the G11 grade.
Further steel players are also expected to experience an increase in inward freight costs on account of the revision in freight rates 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.
As per the ICRA report, the minimum cost increase following the coal price/freight rate hikes and levy of EFC comes to around Rs150/MT of crude steel (when using a combination of G9 grade in the sponge iron kiln and G10 grade in the captive power plant), and the maximum cost increase comes to around Rs.500/MT (when using a combination of G7 grade in the sponge iron kiln and G11 grade in the captive power plant). 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.
“Steel players having a fuel supply agreement or dependent on e-auction/linkage auction will get directly impacted by the recent coal price and freight rate hikes. However, for players sourcing higher grade imported coal for sponge iron kiln, and using domestic coal for captive power plant, the impact would be lower at around Rs.50-80/MT of crude steel production (margin impact of 15-25 basis points at current price levels), Mr. Roy added”.