Steel supply shocks temporary; higher coking coal prices will hurt: JSW Steel

As per a JP Morgan report on the global steel picture, Russia was the largest exporter of steel and Ukraine, the fourth largest in CY20. The Russia-Ukraine war has impacted the global demand-supply dynamic with respect to steel and caused coking coal prices to surge.

To understand how steel companies are coping in the aftermath of the rising coking coal prices, CNBC-TV18 caught up with Seshagiri Rao, Joint MD & Group CFO, JSW Steel.

Rao confirmed that coking coal costs have more than doubled. He explained that coking coal is currently forming around 40 percent of the total cost for steel companies, whereas steel prices in India have only gone up by 10-12 percent, which as a result, has created a bit of a distortion.

He said, "The last few months, the coking coal prices have gone up from $300 to almost close to $650-700 per tonne, so it is more than doubled. Is it possible to pass on the entire cost that is coming on account of not only coking coal, iron ore and other input materials? There are huge distortions that are there in the world. The steel prices, if I look at China and Asia and also in India, they have gone up 10 to 12 percent whereas the same steel prices, if I look at Europe, they have gone up over 50 percent."

Rao explained that if the high coking coal prices continue, then it will hurt in Q1FY23. However, he clarified that there won’t be much impact in Q4 though margin may be slightly lower than Q3.

"So next quarter, if the coking coal prices remain at elevated levels, there will be a problem for the overall margins for the steel companies. For Q4, we have already guided that there will be an increase in the overall coking coal prices. So this quarter, as far as JSW Steel is concerned, there will be higher volumes, but the margins will be slightly lower than last quarter," he mentioned.

Rao explained that the market is only focusing on supply disruptions, and there’s a need to track steel demand shock as well. He believes that lowering demand for Chinese steel is a crucial factor here. Additionally, he mentioned that steel supply shocks could be only a temporary phenomena. Elaborating on demand, he said that incremental demand in FY22 is higher by nearly 12-13 metric tonne.

Rao said, “One important point to look at - we are only talking about supply shocks on account of the Russia-Ukraine war. But on the demand side, we are underestimating the shock which is coming from China. Last year, nobody anticipated that the steel demand in China would come down by 5.50 percent-it is 950 million tonne against a billion tonne in the year 2020. That means the steel demand in China has come down by 50 million tonne.”

“China is increasing the domestic production so the imports are coming down and also, demand within China itself is slowing down. So the impact of that neutralises to some extent the supply shocks which we are seeing. Therefore in my view, it is only a temporary phenomena what we are seeing right now. Things will stabilise going forward. That is why we are already seeing a correction in several commodities globally in the last few days,” he explained.