Steel makers have not had an easy time of it in 2011, with a series of bans on iron ore mining in Karnataka, a new Mining Bill that sets out a profit-sharing formula for miners and supply disruptions in the other key raw material — coking coal — as well.
Steel producers currently import a large portion of their coking coal requirement, given that there is domestic dearth of metallurgical grade coal (low-ash content). This situation is made worse by the Jharkhand Government's decision to shut down 22 mines of Bharat Coking Coal (a subsidiary of Coal India).
Tata Steel, SAIL, Bhushan Steel and JSW Steel have dealt with this shortage through various methods. These include modern coking coal batteries which convert naturally available metallurgical coal into coking coal, which is then used in blast furnaces.
Modern coking coal batteries can use lower grades of coal compared to older equipment. Domestic coal (with high ash content) can be sent through a washery to reduce the ash content.
Companies are also exploring novel means — such as Pulverized Coal Injection — to produce steel and lower their dependence on imported and expensive metallurgical coal. Steel companies can lower costs substantially by blending metallurgical coal with higher-grade imported ore.
Investing abroad
Steel players have also invested in projects overseas to acquire mines in metallurgical coal rich geographies such as Australia, Canada and Russia to secure supplies. Tata Steel has coking coal assets in Mozambique to cater to its European operations. Similarly, JSW Steel has coking coal assets in the US.
NMDC, which is investing in a steel plant, has a tie-up with Russian steel producer Severstal through which it plans to source metallurgical coal for its steel plant which is to be commissioned in 2013-14. Similarly, mid-sized steel producer Bhushan Steel acquired a substantial stake in Australian miner Bowen Energy, which has substantial assets in Queensland.
No easy route
With everybody in the race for such assets, even the acquisition route is not easy. The increased demand for coal and iron ore by steel makers has therefore had governments and regulators looking for their pound of flesh given their fears that several of these reserves are finite and are being depleted rapidly.
Countries exporting substantial amounts of ore, including Australia, Indonesia and Chile, are mulling an overhaul of their mining laws and royalty rates in the form of higher taxes or more stringent mine-allocation procedures. In either case, it will pay off for steelmakers to be sure that they have their raw material supplies in place even if the cost associated with captive mining is higher than it is today.