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Steel: The coke conundrum! - Views on News from Equitymaster
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  • Dec 20, 2006

    Steel: The coke conundrum!

    In our previous write up, we discussed the availability and some of the issues associated with iron ore, the primary raw material used in the manufacture of steel. Let us now turn our attention towards coal, another key raw material used in steel making.

    Coal is by far the most abundant fossil fuel on earth. India has got the 4th largest coal reserves in the world. The coal reserves of India are estimated to be approximately 248 bn tonnes (up to the depth of 1200 m) of which 93 bn tones are proven reserves (these account for 7% of the world proven reserves). Coal production in the country is dominated by public sector companies, contributing to the extent of 90% of the total production. The steel industry accounts for 4% of the total coal consumption in India. Just to give a perspective, about 1.6 MT of coal is required to produce 1 tonne of crude steel.

    Despite abundant reserves, it is indeed ironical that the coal production in India is insufficient to cater to the needs of the Indian steel industry due to which it has to import considerable amount of coal. India is the world’s sixth biggest coal importer, mainly on account of various supply issues. Let us have a look at various issues in supply of coal to the Indian Steel industry, total coal production and impact on steel industry on account of unavailability of key raw material in sufficient quantities.

    Problems despite plenty...
    Though India has got 4th largest coal reserves, it still has to import coal on account of delays in project commissioning, inadequacy of policy framework, inability to create appropriate infrastructure, etc.

    The India steel industry requires coking coal to manufacture coke, which in turn is used in steel manufacturing process, the one that employs a blast furnace. Almost 1 tonne of coking coal is required to produce 1 tonne of crude steel. Out of the total proven reserves, coking coal reserves are about 16.4 bn tonnes and out of this, the prime coking coal reserves amount to a mere 4.6 bn tonnes. The steel industry is expected to grow at the rate of 10% annually. With this kind of a growth rate, the demand for coking coal will get a further boost and it is projected that the industry will require about 70 m tonnes of coking coal annually by 2019-20. Currently, the steel industry procures only 7.5 m tonnes of coking coal indigenously and imports approximately 19 m tonnes. Imports are likely to increase in the future considering the projected robust growth in the domestic steel industry. Moreover, the quality of Indian coking coal is also not suitable for Indian steel industry. The poor quality coking coal has to be blended with imported coal, thus increasing costs. On account of imports, steel manufacturing companies are exposed to international coal price volatility.

    Non-coking coal is one, which cannot be used to prepare coke. But is abundant in India and is converted to coke by blending with coke fines and molasses. The steel industry also imports non-coking coal as the demand is in excess of supply. Over the years, the domestic production growth rate of non-coking coal has been declining due to which power plants (primary consumers of non coking coal) are planning to import larger quantities of non-coking coal for their power requirements. The coal prices internationally have been heading north, leading to downward pressure on margins. Due to lack of coal availability in sufficient quantities, producers at times have to resort to lower grade coal that impacts their productivity and in turn increases costs.

    A brief history and outlook...
    The steel industry being a core sector tracks GDP growth rate. Coal is a raw material for almost all the core sectors like power, steel, cement etc. hence the production and consumption have grown in line with the growth in the GDP. Though, the production of coal in India is not sufficient to meet requirements of all the end user industries, the growth in the production has almost been in line with the GDP growth rate. As per National Steel policy, the demand for steel is expected to touch 110 m tonnes by 2019-20, which translates into a corresponding demand for coal to the tune of 100 m tonnes for the same period under consideration. However, considering the capacity additions in the steel sector and growth of the steel product end user industries like automobiles, the 110 m tonnes level could well be surpassed by 2012 itself. Hence, the production of coal needs to be accelerated to meet the growing demand for steel. In the meanwhile, the coal imports are expected to increase in future on account of shortage in supply. As mentioned earlier, this will expose steel producers to international coal prices and impact their margins.

    Given the rising demand for steel and hence demand for coal, domestic companies will have to find out ways to minimize their operating costs and thus maintain their margins. As far as major players are concerned, Tata Steel has its own captive coalmines close to its plants, while its peer SAIL meets its coal requirements by sourcing it from Coal India Ltd (CIL-that contributes approximately 80% to 85% of total coal production) and partially by imports. Little wonder, these companies have cost advantages vis-à-vis peers, when it comes to key raw materials like coal.



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