Coal Block Auctions Provide Level Playing Fields for Indian Steel

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Early  this month, Indian authorities launched the second stage of coal block auctions after a successful first stage in February.

Free Download: Cost Certainty for Seaborne Coal and Iron Ore Trades

The two rounds of auction, launched under the government’s coal reforms, are expected to bring millions of dollars, helping India nearly wipe out its fiscal deficit, but that’s only part of the story.

New Coal Auctions

The auctions, analysts believe, are likely to boost India’s steel sector since the reforms will help improve the availability of coking coal, a crucial raw material in the making of steel, within the nation.

India’s steel segment is already hoping the government’s recently-launched “Make In India” campaign increases steel capacity to 300 million tons per year. The adoption of better coal-mining technologies and development of the metallurgical coal supply infrastructure is expected to further enhance the supply chain for steel companies such as Tata Steel and Steel Authority of India Ltd (SAIL).

Experts believe the steel industry needs to adopt a strategy to bring in coal security by improving thermal efficiencies of blast furnaces, and by utilizing higher quantities of non-coking/semi-coking coals for producing coke.

Closing the Gap

As per the annual plan document submitted by the Ministry of Coal for 2014-15, the power utility and steel plants in the country will require about 787 million metric tons of coal against which supplies from indigenous sources had been planned to supply about 643 million ton. For the power sector, including thermal power plants, the all-India coal demand had been assessed to be 551 million mt against which supply from indigenous sources has been planned to be about 466 million.

Clearly, for both sectors, the gap will continue to be filled by imports.

That could also be a reason why India’s imports of thermal and coking coal had jumped 31% in February as compared to a year ago. Shipments stood at 17.94 million mt in February compared with 13.72 million metric tons one year ago.

But the February figure was lower than January imports in India of 20.29 mmt.

When it comes to internal production of coal, even Indian steel companies are optimistic that the coal mine auctions and the reforms will help create a more level playing field for them.

Chairman and Managing Director of India’s largest Public Sector Unit, SAIL, C.S. Verma, said his company would be in the running in the next coal auction process to procure more blocks of the black mineral. In a February interview with the Financial Express, he claimed the auctions would provide a level playing field for all companies and facilitate faster development of the mostly untouched coal blocks.

“We will be able to take the advantage of our own coal blocks as we have enough knowhow in the mining,” Verma told FE.

Driving Increased Coal Demand

A report by Wood Mackenzie forecast that India would drive growth in the global seaborne metallurgical (met) coal market during 2015, importing a further 2 million mt.

“This comes at a time when we expect a retreat of around 4-5 mmt in Chinese imports, due to its slowing steel sector, lower coke prices and continued uncertainty regarding trace element standards being enforced on met coal,” the report said.

According to the research firm, India’s increased contribution to global seaborne demand was “being bolstered by its steel production growth which is on course to increase by 4% this year.” Semi-soft coking coal and pulverized coal injection coal will see imports rise sharply thanks to the ongoing focus on hot metal cost reduction.

The author, Sohrab Darabshaw, contributes an Indian perspective on industrial metals markets to MetalMiner.

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