India Steel Revival as Tata Said to Seek Cheaper Coking Coal
India’s biggest steel producers, from Tata Steel Ltd. (TATA) and Steel Authority of India Ltd. to JSW Steel Ltd. (JSTL), are in talks to buy coking coal at the lowest price since 2010, according to three people familiar with the matter.
They expect to contract the steelmaking ingredient at as low as $160 a metric ton for the first quarter, 32 percent below year-ago prices, the people said, asking not to be identified as talks continue. Steelmakers in Korea and Japan that set a benchmark for India have negotiated similar cuts, they said.
Swelling global supply and Europe’s slumping demand have undercut prices, adding to the improving outlook for steelmakers, which jumped an average 11 percent in December. Prime Minister Manmohan Singh last month unveiled plans to accelerate infrastructure approvals and to make buying land easier, all to garner $1 trillion of investments by 2017 in roads, ports and power plants that will use the metal.
“This quarter will probably be the best in the fiscal year for all major Indian steel producers in terms of earnings,” Abhisar Jain, a Mumbai-based analyst at Centrum Broking Ltd., said in a phone interview. “Lower coking coal costs coupled with higher steel prices and an expected surge in demand after a probable interest rate cut are all good news.”
A predicted cut in benchmark interest rates this month may fuel car and home sales.
Charudatta Deshpande, a spokesman at Tata Steel, and R. Jayaraman, spokesman at JSW Steel, didn’t respond to e-mails seeking comment. Arti Luniya, a spokeswoman at Steel Authority, declined to comment before the contract prices are finalized.
Tata Steel fell 0.4 percent to 420.50 rupees, while Steel Authority declined 1.7 percent to 93.85 rupees at the close in Mumbai. JSW Steel reversed a two-day losing streak, rising 0.6 percent to 849.05 rupees.
Tata Steel has climbed 5.1 percent in the past month. Steel Authority, the nation’s second-largest producer, jumped 15 percent and JSW Steel increased 11 percent in the period.
“Stocks of big steel companies have run up on demand expectations,” said Rakesh Arora, head of research at Macquarie Capital Securities (India) Pvt. “We think returns may remain subdued but the downside is limited now because demand will be better than 2012.”
Coal prices averaged about 28 percent less in 2012 as mines in Mozambique, owned by Vale SA (VALE5) and Rio Tinto Plc (RIO), started production and on higher output from Mongolia. Quarterly contracts with miners including BHP Billiton Ltd. (BHP) and Anglo American Plc (AAL) may be signed by the end of the month, two of the people said. Prices had surged to a record $330 last fiscal year as demand rose and supplies were disrupted by heavy rains in Australia, the biggest producer.
Kobe Steel Ltd. (5406), Japan’s third-largest steelmaker, settled coking coal prices at $165 a ton for the January to March quarter, compared with $170 a ton in the previous quarter, Hiroyuki Hashimoto, spokesman at Kobe said in a phone interview on Jan. 8. It also settled iron ore prices at $103 per ton, down from $117 a ton in the October quarter, he said.
Eleanor Nichols, a spokeswoman for BHP Billiton, the world’s biggest exporter of coking coal, said the Melbourne- based company doesn’t comment on contractual arrangements. Kim Ji Young, a spokeswoman at Posco (005490), South Korea’s biggest steel producer, declined to comment.
India’s steel ministry forecast demand for the alloy will quicken this year after the government eased infrastructure investment rules to revive an economy that’s expanding at the slowest pace in a decade. Consumption probably will increase 8 percent in the three months to March 31 and in the year from April 1, Sayan Sen, manager at the ministry’s Joint Plant Committee, said on Dec. 27.
“Steel essentially follows the economic pattern and now that things are improving there would be demand for the alloy,” said Jayant Acharya, director at JSW Steel, in an interview on Jan. 1.
Demand may also be fueled by a probable cut in interest rates that will lower borrowing costs. Reserve Bank of India Governor Duvvuri Subbarao signaled higher odds on Dec. 18 for a cut in interest rates this year as he held borrowing costs unchanged for a fifth policy meeting. Goldman Sachs sees a “high likelihood” of a 50-basis point reduction in the policy review due on Jan. 29, Tushar Poddar, the bank’s chief India economist, wrote in a note to clients.
DLF Ltd. (DLFU), India’s largest builder of homes and shopping malls, will accelerate projects around the nation’s capital in the next three to four months to benefit from higher demand, Senior Executive Director Sriram Khattar said on Dec. 21. A spurt in real estate activity will raise demand for long steel products that comprise more than half of local consumption.
“In terms of demand, we are expecting India’s GDP growth to be higher so definitely there would be a rub-on effect, plus reforms should put the investment cycle back on track,” Macquarie’s Arora said. “Consumption should improve, but so should the supplies as newer capacities get added.”
China’s higher self-reliance on coking coal and the increasing share of imports from Mongolia, which is through land, have limited gains for sea-borne coking coal prices, said David Radclyffe, managing director for equity research at Nomura international Plc in London.
“Coking coal prices have recovered considerably from their lows in September because of anticipation that Chinese steel mills will expand production but increased supplies from Australia’s Bowen Basin have capped prices,” he said. “In other regions, such as Europe and Japan, steel production hasn’t been very encouraging.”
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