Indian Metals & Ferro Alloys Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Cost cycle peaked in Q2: Coke hit nearly \$700 and coal was booked at INR 10,000–12,000, making Q2 the high-water mark for the two largest uncontrollable costs. A dip is expected in Q3 as lower-cost inventory is consumed.
• Force majeure absorbed without volume loss: Posco’s typhoon-damaged stainless steel mill stopped taking shipments, but the company redirected those tonnes to other long-term customers and expects to hold overall volumes near 60,000 tonnes.
• Freight costs collapsed post-quarter: Container freight dropped roughly 75% from ~\$1,000 to \$200–\$250 per container, and bulk freight fell 50–60%, a tailwind that will begin showing in Q3.
• Margins at industry pain threshold: Management stated that at Q2 EBITDA margins, 70–80% of world ferrochrome capacity would be unviable and shut, a floor that has already triggered some price recovery.
• What to watch next quarter: Whether the promised cost dip actually lifts EBITDA, the pace of Utkal compensation receipt, and any further ferrochrome price response to capacity stress.

Cost Cycle: Peak, Decline & Volatility

• Coke peaked near \$700: Colombian coke (the company’s ultra-low-cost source) stayed elevated because coking coal was diverted to European power generation for winter heating, while Chinese coke fell from \$700 to \$450 but remains volatile, recently ticking back to \$394 coal-equivalent.
• Coal cost already easing: Blended coal cost fell from ~INR 5,500–5,600 in Q1 to ~INR 5,200 in Q2 as spot auction prices dropped to INR 7,500, and Q3 blended cost is expected around INR 5,000.
• Power cost per unit declined QoQ: From INR 5.94 to INR 5.69, driven by the lower auction coal price flowing into the 50 MW plant, though that plant’s coal cost stayed higher because it runs only on MCL coal.
• MCL linkage constrained: The company is receiving only 75% of its linkage allocation because MCL is diverting rail rakes to independent power producers; road supply continues but rail supply is tight, with no timeline given for a return to 100%.
• Raw material cost rose INR 20 crores QoQ: Coke moved from ~INR 20,000 to INR 22,000 per tonne and power cost from INR 23,000 to INR 25,000 per tonne, the main drivers of the cost peak.
• Other expenses spiked on freight and CSR: Other expenses rose nearly INR 20 crores, split between sharply higher freight and some CSR spending in the quarter; the CSR figure was not quantified on the call.

Prem Khandelwal: “Likely, it looks like this was the peak of cost and it should come down going forward.”

Ferrochrome Pricing & Realization

• Q3 average realization will dip slightly: Despite spot price improvements domestically to ~INR 105,000 and in China to \$0.92–\$0.93, the Q2 average was higher, so Q3’s overall average will be lower even as spot moves up.
• International benchmark lower in Q3: The quarterly international ferrochrome price settled below Q2, capping overall realization even if spot markets strengthen.
• Cost floor argument for price support: Management argued that at Q2 margins, 70–80% of global capacity would shut, and that this dynamic has already produced some price spike; Q3 and Q4 should see further increases if costs do not come down.
• Chinese demand recovering, with one caveat: Ferrochrome demand is rising and real estate is coming back, but zero-COVID policy resurgence in pockets remains the main hurdle.
• UG2 price rose to \$245: Driven by the Transnet strike, now resolved; prices may stay at this level or edge higher because costs are elevated for all producers.

Prem Khandelwal: “I don’t think the ferrochrome price can come down because in Q2, whatever we have seen, if we are not — we are coming to this kind of margin then almost 70%, 80% of the world capacity will get closed, okay they cannot make easy.”

Posco Force Majeure & Volume Management

• Posco declared force majeure after typhoon damage: One of three furnaces has restarted at the lowest level and the rolling mill is substantially affected; stabilization is expected to take another three months, with full operations possibly in the first calendar quarter.
• No volume loss expected: Dispatches to Posco stopped in Q3, but those quantities are being redirected to other long-term customers in China, Taiwan, Japan, and some domestic supply, keeping overall sales near 60,000 tonnes.
• FX loss of INR 14–15 crores: The entire working capital is dollar-denominated because 90% of sales are exported, and exchange rate fluctuations caused the loss; gains on revenue are netted within revenue itself per accounting standards.

Freight & Other Cost Tailwinds

• Container freight collapsed post-quarter: Dropped from ~\$1,000 per container to \$200–\$250, a roughly 75% decline.
• Bulk freight down 50–60%: Dread fall freight rates have also fallen sharply, and these savings will begin flowing through in Q3.
• Management declined to quantify the bottom-line impact: When asked for a ballpark number on Q3 freight savings, management said it would be very difficult to give any figure, and also declined to provide the September vs. October freight cost difference.

Prem Khandelwal: “In fact the freight cost has gone down very drastically now. It’s almost 25% — I mean come down to 25% level. It’s down by 75%.”

Utkal Compensation & Kalinganagar Project

• Utkal vesting order issued to JSPL on 10 October: The statutory portion of ~INR 20 crores was expected by end of October 2022; the balance, after a valuation process expected to take three to four months, is due by March 2023.
• Full investment recovery expected: The company expects to get back its entire investment; INR 176 crores is a tentative figure and the final number will be higher, with interest on leased land included and payable.
• No transparency on valuation method: A valuer has been appointed by the Nominated Authority, but management stated there is no transparency at all on the calculation method and they will know the number only after receiving the report.
• Kalinganagar land lease signed: Possession work is ongoing and possession is expected by end of December 2022, after which boundary wall construction will begin.
• Project timeline: The DPR has been given to M N Dastur and is expected by December end; major capex will occur in calendar years 2023, 2024, and to some extent 2025, with commissioning expected in April 2025.
• Next six months: Boundary wall construction after possession, stringing of the power line, and ordering of equipment once PRL is frozen.

Prem Khandelwal: “There is no transparency at all about that. We don’t know how they’re going to do it. So they have appointed some valuer, who is going to do the valuation. We’ll come to know their valuation only after getting numbers once they give their report.”

Strategic Optionality

• Open to Balasore Alloys via NCLT: Management confirmed interest if the asset comes up, but no deal exists as of now.
• Manganese mine search underway: If the company secures manganese mines, it can convert ferro plants to ferromanganese; it is open to opportunities outside India, but only as an integrated play with a mine.
• More linkage coal on the radar: The company will look for additional linkage coal as and when offers come.

Prem Khandelwal: “If we’re getting coal, if we’re getting coal, that is good enough, that is good enough.”

Guidance & Commitments

Key Metrics