Leading mining companies, such as Anglo American giant Rio Tinto and BHP Billiton are pushing for monthly prices for coking coal contracts instead of the quarterly system that is in place at present, bringing Indian steel manufacturers such as SAIL and Tata Steel under pressure.
Until now Indian companies have been signing contracts for the supply of coking coal on the basis of prices that are fixed for a three-month or quarterly period, and this shields them from the volatility in prices that occurs in the short term.
However, if a strong mining cartel manages to push through contracts based on monthly prices the Indian companies stand to lose as they would have to contend with volatile prices in an inflationary market. These fluctuations in prices introduce uncertainty as they have a cascading effect on product prices as well.
A senior SAIL official disclosed that discussions were on with the mining companies on the matter.
The issue is not India-specific but involves all the countries including China, which imports coking coal for making steel.
MINING FOR MORE
DANGERS OF CARTELISATION
THE TREND THAT WAS
- Mining giants Rio Tinto & BHP Billiton are pushing for higher monthly prices for coking coal contracts
- This is putting Indian steel manufacturers such as SAIL and Tata Steel under pressure
- Till now Indian companies have been signing contracts for the supply of coking coal on the basis of prices fixed for a quarter
- This shields them from the volatility in prices that occurs in the short term
- If a strong mining cartel manages to push through contracts on monthly prices basis, Indian firms stand to lose as they would have to contend with volatile prices in an inflationary market
- These fluctuations introduce uncertainty as they have a cascading effect on product prices, too
Indian steel manufacturers could see an erosion in profits since it would be difficult to pass on the increased costs to buyers as demand, especially for long products used in construction, has started to taper off.
While thermal coal is used as a fuel for producing heat, coking coal is an essential input that is mixed with iron ore for manufacturing steel. According to SAIL officials, each tonne of steel that is produced requires one tonne of coking coal as an input. Indian coking coal is of poor quality because of its high ash content as a result of which domestic steel makers have to import coking coal. SAIL uses about 14 million tonnes of coking coal in a year with imports accounting for as much as 10.5 million tonnes.
Thermal coal is imported by power companies, such as NTPC mainly from Indonesia while coking coal is sourced by the steel companies largely from Australia.
A senior SAIL official said, "Around 70 per cent of the firm's coking coal imports come from Australia with the rest coming from USA and other countries." Australian coking coal output had been hit due to flooding caused in the Queensland state by heavy monsoon rain in the first quarter of the current year.
The Queensland Resources Council has estimated the state lost as much as 30 million tonnes of coal output because of the floods, which has exerted an upward pressure on coal prices. Coking coal prices were at $220 per tonne in the January to March quarter and are, according to some analysts, headed towards the $300-per tonne mark.
However, SAIL officials are of the view that since Japanese steel mills have cut back production in the wake of the havoc wrought by the earthquake and Tsunami, there would be some easing in demand which would help restrict the price rise.Courtesy: Mail Today