Just when life was getting good for Indian steelmakers, the price of coking coal goes up.
The increasing price of global coking coal, a key ingredient in steelmaking, may squeeze Indian steelmakers’ profitability and deepen financial risks, according to a Fitch Ratings report. Prices had crossed the $190-a-metric-ton mark recently. The steel companies risk will also increase if the high prices persist while domestic steel demand growth remains low. Which essentially means that the increase in raw material costs for Indian steel producers may shrink their margins, if the rise is not passed on to consumers.
Coking Coal Imports
The bulk of India’s coking coal is imported to compensate for the lack of good quality coal from the country’s own mines. In addition to steel plants, the raw material used by coal-based power plants, cement plants, captive power plants, sponge iron plants, and almost all depend on importing non-coking coal.
Coke is imported mainly by pig-iron manufacturers and iron and steel sector consumers using mini-blast furnaces. India imported around 200 million mt of coal last financial year to top domestic production of 640 mmt.
So India, despite efforts by the government to reduce its dependence on foreign coking coal, has to import it from countries like Indonesia, South Africa, Russia and Australia. Coking coal prices in Australia have surged in the last few months, so what’s good news for that nation is bad news for India’s steel makers.
Alternative Procurement Methods
Indian steel companices are resorting to various means to combat rising international prices. Companies like Tata Steel and SAIL, keen to buy domestic coking coal, have asked the government for more auctions. Jindal Steel and Power Ltd. has reopened its mines in Mozambique from this month. ()
Paying heeds to local demand, Coal India was planning to put up more coal for e-auctions. Coal India will put up 20 mmt of coal for e-auction, where both the regulated and the non-regulated sectors, including traders, will be able to participate.
One of the two methods of making steel is the electric arc furnace (ARF) process. The advantage in this method is that it reuses steel scrap including some direct reduced iron (DRI) or pig iron for chemical balance. The EAF operates on the basis of an electrical charge between two electrodes providing the heat for the process instead of coal.
Unlike China, though, the Indian recycling sector is a highly unorganized one. China recently declared plans to fully use steel scrap in its reserves for steelmaking. Other countries like the U.S. also rely heavily on the use of scrap and had very high scrap ratios. China, too, will soon have no option but to recycle all steel scrap.
The Indian metal recycling sector is still in a nascent stage, without any regulations in place. A recent Frost & Sullivan Metals and Minerals Practice report said the Indian metal recycling industry was “challenged by key interlocking crises of minimal existence of a metal scrap recycling ecosystem and lack of any domestic laws and legislation that assist and apply to the industry.”
The overall Indian recycling rate is about 25%. Compare this to the U.S. — which is a net exporter of scrap with recycling rates of 80 – 90% — and Europe, which has recycling rates in excess of 70%.