March quarter’s sharp uptick in raw material costs and poor pricing power is the expected to dent the financial performance of listed steel-makers. Steel production has grown in double digits for most of the companies during the quarter and realisations improved, but profitability will definitely suffer because of tripling prices of coking coal from $50/tonne to $160/tonne in March 2017. According to Essar Steel, input costs have been growing without any corresponding increase in selling prices in last two quarters as steel companies are not able to pass on the increase to their customers.

Despite a sequential improvement in realisation of Rs 1,500-2,000/tonne, Elara Capital expects operating income of steel manufacturing to be hit on the back of higher coal costs. JSW Steel is expected to be affected the most as it has been hit with both higher coal cost increase by Rs 3,400/tonnes and iron ore cost by Rs 200-250/tonnes in fourth quarter.

Steel-makers have been sourcing raw materials over the last few years on the basis of index prices. The speculations and events like cyclones often impact the index-based prices which have replaced the long term contracts and increases volatility. Most of the Indian steel-makers have been \struggling to source iron ore and coking coal over the last few years as supplies have been disrupted for a variety of reasons. Both the raw material prices have spiked in the March even though steel demand has increased at a modest 3.5% in FY17.

Coking coal prices was $80/tonnes average in the fourth quarter of FY17 as against $52/tonnes a year ago. Steel industry of India is majorly depend on coking coal imports, supplies were disrupted when cyclone Debbie hit Australia at the end of the March 2017 and prices spiked to $160-180/tonne.

Madan Sabnavis, CARE Ratings’ Chief Economist said, “The steel companies in India do import coking coal from Australia. Thus, the sharp rise in prices will increase the cost pressure for producers, in turn, leading to a rise in steel prices.”

Seshagiri Rao, Joint Managing Director and Group CFO of JSW Steel said, “Iron ore prices were at USD 40/tonne in January 2016 and they were at USD 90/tonne a couple of weeks ago. There is no reason iron ore prices should go up so sharply since demand has not gone up.”