Steel companies betting on India-Australia ECTA to source coking coal cheaper

Suresh P. Iyengar | | Updated on: Apr 10, 2022

The free trade agreement (FTA) signed between India and Australia last week will bring down the import cost of coking coal for steelmakers and boost their financials as coal costs account for over 50 per cent of production expenses.

After negotiating for about 11 years, both countries signed a historic trade deal — the Australia-India Economic Cooperation and Trade Agreement (ECTA). This agreement will provide, among other benefits, duty-free access to India for about 96.4 per cent of exports. Both governments expect this deal to boost bilateral trade to $45-50 billion over the next five years.

Under the ECTA, the effective tariff of 2.5 per cent will be eliminated upon the agreement’s entry into force for most types of coal including coking coal, which accounts for the majority of Australia’s coal exports to India, said an Australian High Commission spokesperson.

Indian steel companies are completely dependent on imported coking coal as it is not produced in India. Australia is the preferred destination compared to the US and Canada due to logistics convenience. Coking coal shipments from Australia to India have grown over five-fold to 16.5 million tonnes between last January and September, particularly after unofficial of ban of trade between China and Australia.

Ranjan Dhar, Chief Marketing Officer, AM/NS India, said that the signing of the IndAus ECTA will help steel companies source coal and other raw materials duty-free from Australia and will boost trade between both countries in the long run. More importantly, he said the key raw material in steel production coking coal, which had seen a significant price rise over the past few months, can now be imported without any duty as Australia is a major supplier of this crucial fuel. This could reduce the cost of steel production, he said.

However, with the steady rise in coal prices and frequent shut down of ports due to inclement weather in Australia, most of the steel companies in India have been diversifying their coking coal sourcing to Russia, which is now selling coal at a discounted rates amid sanctions imposed by the US.

VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, said Australia accounts for 20 per cent of India’s coal imports while Russia accounts for only 3 per cent. India has $3 billion trade deficit with Russia and, therefore, settling coal imports in roubles, if available at a discounted rate, would be good for India since the rouble has depreciated after the outbreak of the Ukraine war.

Jitendra Upadhyay, Senior Equity Research Analyst, Bonanza Portfolio, said Russia accounts for over 10 per cent of the global supply in coking coal which is mostly sold in Asian markets. The geopolitical situation has added to concerns of inflation in raw materials for steel, aluminium and textile industry. Through this FTA with Australia, India will get cheaper raw materials compared to earlier as input cost inflation is a key risk to India, he added.

Published on April 10, 2022
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