Coal’s not well: Steel mills see the margins melting

Indian steel mills are grappling with shrinking profit margins as coking coal prices surge, driven by disruptions in Australia and China, as well as the ongoing Iran war. India, the world's second-largest steel producer after China, relies heavily on imports to meet its coking coal needs, with Australia being the primary supplier.

Coking coal constitutes nearly 40% of steel production costs, and the rising prices could hinder investment and delay capacity expansion amid robust domestic demand fueled by infrastructure projects and economic growth.

Premium hard coking coal prices have surged by 25% from the previous year, averaging $236 per metric ton freight on board (FOB) in Australia during the first seven months of 2026, according to Banmeet Khurmi, lead of metallurgical coal and coke market service at consultancy CRU. The price increase is attributed to supply disruptions in Australia, slower than expected production at new mines, price support resulting from the Middle East conflict, and a significant accident in Shanxi, China.

The Shanxi coal mine disaster is expected to contribute to ongoing supply shortages in the second half of the year.

The impact of higher coking coal prices is evident in the steelmaking costs, with each $10 per ton increase in coal prices adding approximately $7 to $9 per metric ton to production costs, as per an executive at a major steel mill. Steelmakers face limited room to raise steel prices due to intense competition from lower-cost Chinese steel. Despite China's continued shipments of steel, import tariffs on certain grades have not significantly alleviated the pressure on margins.

Indian steelmakers are expected to increase their imports of coking coal by 2 million to 3 million tons in 2026-27, from 64 million tons in the previous year, according to BigMint, a commodities consultancy. This surge in demand will also lead to higher transport costs due to disruptions caused by the U.S.-Iran war, resulting in tighter trade flows.

Iron ore imports from Australia are expected to remain stable, but the cost of diesel, freight, and insurance has risen, further affecting transportation expenses, said Hui Ting Sim, vice president at Moody's Ratings.

Australia is projected to continue meeting at least half of India's coking coal requirements, although imports from Russia, Mozambique, and the United States are anticipated to grow. The demand for Russian coal discounts, which accounted for 24% of India's coking coal imports in recent years, has diminished over the past two years.

In the long run, Mozambique is expected to surpass the United States and Russia as the second-largest exporter of coking coal to India after Australia. State-owned Steel Authority of India and JSW Steel are exploring Mozambique as a potential source of coking coal, but logistical challenges continue to pose obstacles to diversifying India's coking coal imports.