Tata Steel to Consider Market Sales of Coal on New Mining Law

Tata Steel Ltd., which mines most of its own coal to produce the alloy in India, will consider selling the fuel in the open market with the government on Thursday passing a law that may end Coal India Ltd.’s monopoly.

“Having been in coal and iron ore for a century, that is a line of business to look forward to,” Koushik Chatterjee, group chief financial officer at India’s biggest steelmaker, said on Thursday.

Tata Steel, whose earnings are under stress amid weak steel demand and a supply glut worldwide, has mined coking coal and iron ore since early last century for feeding its steel factory in the eastern Indian city of Jamshedpur. The company, which produces about 7 million metric tons of metallurgical coal for its own use, will have to bid for new coal mines to sell the fuel in the open market, which is dominated by state-owned Coal India.

A new law that proposes to attract private investment in the mining of coal was passed by lawmakers in India’s upper house today. Lawmakers earlier today approved the minerals mining bill, which will speed up auctioning of iron ore, bauxite and other mining assets and draw investors to a growing, resource-hungry nation.

“It’ll take about four years for the first output from private mines to come to the market,” said Giriraj Daga, a portfolio manager at SKS Capital & Research Pvt. in Mumbai. “It’s too early to say how much private miners would benefit from this.”

Falling Prices

Profit at Mumbai-based Tata Steel, which bought Corus Group Plc in 2007 for $12.9 billion, is estimated to fall 41 percent to 21.1 billion rupees ($337 million) in the year ending March 31, according to the median of 36 analyst estimates compiled by Bloomberg.

Higher local output, increased imports and falling exports mean there are 7 million tons of additional supplies in India, compared with 2 million tons of incremental demand, according to steel ministry data.

“There is certainly pressure on margins,” Chatterjee said. “We have seen about 1 million tons of steel being imported into the country a month. We are taking internal initiatives from both the revenue side and the cost side.”

Klesch Talks

In Europe, Tata Steel’s biggest market, the company’s negotiations with Swiss investment firm Klesch Group for the sale of its long-products manufacturing and distribution sites in the U.K., France and Germany may take longer to conclude than anticipated, Chatterjee said. Tata Steel is, meanwhile, focusing on raising output of higher-value products and cutting costs.

Tata Steel in October said it had started talks with billionaire Gary Klesch’s company. A successful sale will help Tata Steel pare net debt that currently stands at about $11 billion.

“Talks are ongoing,” Chatterjee said. “These things take time to deliberate and decide. It doesn’t look to get over by March.”

Tata Steel’s European unit, which accounts for more than half of the steelmaker’s global output, is trying to lower its ratio of net debt to earnings before interest, taxes, depreciation, and amortization, Chatterjee said. The ratio is a measurement of leverage.

“It’s also a function of earnings capability,” Chatterjee said in an interview at his Mumbai office. The emphasis is on building “earnings capability and product differentiation,” he said, without elaborating.

Rising Leverage

The ratio climbed to 5.3 in the year ended March 2013 and is estimated to drop to 4.95 in the year ending March 31, according to data compiled by Bloomberg. The leverage rose after the purchase of Corus enlarged Tata Steel’s total debt to $13 billion as of March last year.

Tata Steel raised the equivalent of $6.1 billion via loans in July and October to build a new plant in India and to refinance debt, according to data compiled by Bloomberg.

“We took advantage of the market liquidity and better performance of the European unit,” Chatterjee said on refinancing. “We got a longer tenor as well as favorable credit terms. Pricing has been lower and covenant terms lighter.”

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