India Ratings and Research believes the cost of production for India’s steel producers using the blast furnace route would remain contained in the near term, supported by the negative bias on coking coal prices due to China’s ban on Australian coking coal. Softer coking coal prices shall directly support EBITDA per tonne accretion of around INR 2,600 over FY21 for companies using the blast furnace route. Such companies are likely to have reduced cost of steel production by around INR 1,800 per tonne YoY in 2HFY21, supported by the reduced cost of coking coal per tonne of around INR 7,300 (2HFY20: INR 9,100, FY20: INR10,000).
Ind-Ra expects Australia premium hard coking coal CNF prices would be around USD 120 per tonne over remaining FY21 (November 2020: USD 111 per tonne, average for 8MFY21: USD 125 per tonne), except for any weather-related supply disruptions in Australia.
China and Australia have been the largest coking coal trade partners in the world. China’s imports and Australia’s exports, respectively, form 40% and 65% of the World’s overall imports and exports. Considering the low coking coal imports by China in 7MFY21 and a possible further reduction amid China’s ban on Australian coking coal, an excess supply would build-up unless Australian miners reduce their output considerably. Hence, Ind-Ra understands coking coal prices would remained soft although other major coking coal importers such as India, Japan and South Korea’s production levels have recovered them to pre-covid levels.