Coking coal costs set to double for steel firms

Indian steel manufacturers such as Tata Steel, Steel Authority, Ispat and Essar Steel will see their expenditure on procurement of coking coal more than double in 2005 as they renew their annual contract next year.

This could very well lead to rise in steel prices when contracts are renewed and bottomlines are being squeezed.

Predictions by coal experts have gone haywire because prices to be paid by companies entering into contracts will be around $125 per tonne against $56 being paid by them this year "" a 92 per cent rise.

The domestic steel manufactures are likely to end up paying more than that.

Annual contracts entered into by Japanese Steel Mills (JSM) which is considered the benchmark contract price globally for coking coal has actually doubled when Nippon Steel Corporation and Sumitomo Metal Industries renewed their contracts recently with BHP Billiton "" the Melbourne-based world's largest mining company.

The steel industry consumed around 7 million tonnes of coking coal till December this year from the global market and it is only recently that major steel manufacturers have started entering into contracts with international coal miners to keep their costs down.

"There are around 10 JSMs and the larger of two have renewed their contract with BHP at double the last year's price. This is a disturbing development for the domestic steel sector which might end up paying more than the benchmark price being paid by JSMs," explained Gautam Kumar, president, Coal Consumers Association.

"The recent hike in railway freight on coking coal and iron has already added to costs," he added.

"Further consumption of coking coal is also likely to rise with steel majors lining up a number of expansion plans and demand for steel rising," Kumar explained.

Companies such as Tata Steel and Steel Authority would renew their contracts by April, by which time prices would have risen by another five to 10 per cent, explained experts from the industry.

"Even sometimes back, investment banker UBS had predicted international contract prices of coking coal to rise by as much as 64 per cent from April 2005, which has been proved wrong by the JSM companies," he added.

The spurt, according to experts would be propelled by rising demand because Chinese steelmakers and power stations would drive up raw material demand.