In light of the Chinese embargo on Australian coking coal, a serious demand deficit of the element has led to a considerable fall in prices globally. The fall in the prices of coking coal is expected to benefit Indian steelmakers, as the cost of producing steel via the blast furnace route would remain contained in the near future until the Chinese ban on Australian coal is not lifted. The same has been explained by India Ratings and Research (Ind-Ra), according to whom, the Chinese move will lead to softer coking coal prices which shall directly support EBITDA per tonne accretion of around Rs 2,600 over FY21 for companies using the blast furnace route.
“Such companies are likely to have reduced cost of steel production by around ₹1,800 per tonne YoY in 2HFY21, supported by the reduced cost of coking coal per tonne of around ₹7,300,” Ind-Ra said in its report. A reduction in the cost of steel production will most definitely result in higher profits for manufacturers, who might even pass down the benefits of the same to consumers by slashing retail prices, thus creating a positive sentiment within the country to pump infrastructure spending while the prices of the most basic material – steel are unnaturally low.
It would not be an overstatement by far, therefore, to suggest that the Chinese ban on coking coal imports from Australia will result in higher spending within India on infrastructure and developmental projects. China might have taken the decision of banning Australian coal with the sole intention of hurting the Australian economy, but the after-effects of the same might very well result in the paper dragon itself triggering an upward trajectory for the Indian economy in the very near future.
The Indra-Ra report added, “Considering the low coking coal imports by China 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.” In light of the same, the report concluded that the prices of coking coal will remain ‘soft’ even as major coking coal importers such as India, Japan and South Korea’s production levels have recovered them to pre-Covid levels.
It is important to note that China and Australia, prior to the former’s ban on coal imports from down under, were the largest trade partners of coking coal. While China’s imports form 40 per cent of the overall imports, Australia’s exports make 65 per cent of the world’s overall exports of coking coal. The demand deficit, therefore, is significant, which will lower the production costs of steel in India from Rs. 9,100 per tonne in the same duration last year to Rs. 7,300 per tonne now.
Meanwhile, Chinese cities are going dark and the CCP administration is rationing electricity across its major cities due to a lack of power generation, triggered by the ban on Australian coal. The Chinese people are being forced to follow strict terms and conditions while operating necessary electrical home appliances, like heaters in the winter months. Essentially, the ego of one man in China is having an incredible spillover effect across the world.