Tata Steel Europe is betting on production from the African mines scheduled to be functional from March.
Tata Steel Europe's concerns about acquiring coal assets are set to ease soon. Its Mozambique mines, owned jointly with Rio Tinto, will start production from March. The coal would be sent to the company's plants in Europe and at Jamshedpur in India.
Karl-Ulrich Kohler, managing director and CEO, Tata Steel Europe, said, "The Mozambique mines start production in March and it will be relevant to us immediately. That is what we are building upon."
Raw material costs have been a serious cause of concern for the company. Although Tata Steel did not give the raw material costs for its European operations, it admitted to squeezed margins. Profits for Tata Steel Europe's second quarter ended September 30 dropped 42.8 per cent year-on-year, and 73.5 per cent sequentially.
Kohler said high raw material prices and the lower average selling price of steel had dented the company's profits. The situation would continue as the third quarter is generally a lean one for sales because of the holiday season. "Sluggishness in construction sector continues and will continue," he said.
Some quantities of the coal would come to India as well, but the company did not share the break-up. Tata Steel's India operations are fully integrated when it comes to iron ore. The company imports its coking coal requirements.
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Squeeze on Margins
The Mozambique project becomes a lot more crucial for Tata Steel Europe as the company continues to grapple with falling steel demand. It has already mothballed and idled its blast furnaces, reducing the effective steel-making capacity.
A company official told Business Standard, "The Benga project in Mozambique is supposed to make three of our European plants integrated in terms of raw material." The plants are in Scunthorpe, Port Talbot and Ijmuiden. Therefore, most of the coking coal will find its way to the European plants."
Tata Steel has 35 per cent stake in the project the rest being with Rio Tinto. The company has a 40 per cent off-take agreement with Rio Tinto. This means, Tata Steel will own 40 per cent of the total coal mined out of Benga.
The first phase of the project will see mining of 5.3 million tonnes (mt) of run of the mine a year. This translates to 2 mt every year, or, 1.7 mt of hard coking coal. Coking coal has less ash content and is used in making steel. Coal with high ash content is called thermal coal and is used in power generation.
The companies are yet to seal the timeline for the second stage. The mining capacity is planned to double, to 10.6 mt in this stage. The last and the final stage will see the mine producing 20 mt of run-of-the-mine coal every year.
An analyst tracking the company said, "Although the initial coal from the Benga won't give much cushion to the company, it is a start. It is a long-term project and is very crucial for the company."