Divergence in prices of coking coal and thermal coal will dictate the margins of primary and secondary steel producers in the second half of the fiscal.

While the large integrated players like Tata Steel, JSW, AMNS, SAIL will feel the pinch of hardening coking coal, mainly imported from Australia, the smaller players which take sponge iron or the electric arc furnace route using thermal coal for production will benefit from the benign raw material cost.

The margin picture will also be impacted by the average price of the long and flat products. While the average price of long items — bars, rods and wires — will be higher in October-March compared with the April-September period, the prices of flat products — hot and cold rolled coils — will be marginally lower in the H2 compared with H1 of FY24.

A research note published by rating agency Icra said blast furnace operators are likely to suffer a sequential 135 bps margin erosion in H2 FY24, while secondary producers are likely to see higher margins by 75 bps.

Blast furnace operators use coking coal as a reducing agent to convert iron ore to metallic iron. However, domestic supply of coking coal is negligible, forcing companies to depend on imports.

“Due to supply-related constraints in Australia, spot premium hard coking coal cargoes unexpectedly rallied up by 50-55 per cent in a short span of three months, reaching an interim high of US$ 363/MT (fob Australia) in mid-October 2023,” Jayanta Roy, senior vice-president & group head, corporate sector ratings, Icra, said.