In a bid to reduce costly imports and excessive dependence on Australian coking coal, India is all set to acquire a coal mine in Mongolia and set up the first steel plant there. The Indian government says the plan is to first supply the coal needed for the steel plant and then export the rest to India.
The country is battling a massive shortage of coal. Interestingly, for the first time last year, China imported more coal from Mongolia than from Australia. By securing its own feed, and especially with Australian coal prices hitting the roof, analysts say India will soon be able to tap into what is considered a rich resource.
Coking coal prices from Australia shot up last year, to more than $300 a tonne, after floods took out 16 million tonnes of annual production from Queensland mines, in late 2010 and 2011. An analyst with Mumbai-based brokerage firm Pinc Research said the drastic rise in prices hit the bottom lines of Indian steel makers, who rely mainly on imports to meet their requirements.
“Coking coal prices, which shot up to around $320-$350 a tonne, did not come down despite normalcy being restored in the Australian mines. Australian coking coal prices shot up from $125 in 2010 to $350 in 2011. Currently it is moving between $200 and $230 per tonne. The profit margins of most energy-intensive industries in India such as cement, aluminium and sponge iron have come under pressure in the March quarter due to this,” said an analyst.
Moreover, Australia’s Mineral Resource Tax that will levy a 30% tax on the profits of iron ore and coal mining companies, got approved by the Australian Senate on March 19, 2012. The tax is due to start on July 1, 2012 and is expected to generate AUD$ 11.0 billion in its first three years. Australian miners will likely pass on the cost hike to their customers – steel producers in India – impacting profitability. Pinc Research estimates the tax will push up coking coal prices by 4%.
India currently imports a major chunk of coking coal from Australia and with India’s steel capacity going up over the next 18 months, the coking coal demand is expected to move up equally.
The new agreement in Mongolia is set to help ease the burden. An Indian delegation comprising the chairman of the Steel Authority of India, C S Verma and U P Singh, joint secretary in the Ministry of Steel are in Beijing and are to visit Ulaanbaatar to formalise the accord.
Speaking to newswires, Verma said the memorandum of understanding with the Mongolian government would be for the allocation of coking coal mines. He told newspersons that the Indian government has been in talks with their counterparts in Mongolia for about a year on the issue.
Despite abundant coking coal mines, Mongolia does not have any steel plant of its own. Verma said Mongolia has very good quality coking coal mines and that India does not have such quality coal mines. The reciprocal arrangement would be to set up a steel plant there and the Mongolian government would, in turn, allocate coking coal mines.