The long wait for Tata Steel Europe to get its own coal is set to get over with its Mozambique mines, owned jointly with Rio Tinto, scheduled to start production in March.
The company said that it expects the production to begin from March 2012. Plans have been firmed up to bring the coal to Tata Steel's various plants in Europe and at Jamshedpur in India. Karl Ulrich Kohler, managing director and CEO, Tata Steel Europe said, "It (Mozambique mines) starts production in March and it will be relevant for 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 that it has squeezed margins. Profits for the second quarter ended September 30, 2011 for Tata Steel Europe dropped by 42.8% year on year, and, 73.5% sequentially.
Kohler said that high raw material prices and lower average selling price of steel have dented the company's profits. The situation will continue as the third quarter is generally a lean one for steel sales because of the holiday season. "Sluggishness in construction sector continues and will continue going forward," he added.
Some quantities of the coal will also come to Tata Steel's plants in India but the Tata Steel did not want to share the break-up. Tata Steel's India operations are fully integrated when it comes to iron ore. The company imports all of its coking coal requirements.
The 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, IJmuiden.
Tata Steel had invested in the Benga project to secure raw material for its European and Indian operations. The company has earlier said that certain portions of coal might also come to its plant in India, if feasible. The official said, "The benefit of stake-holding in Benga project is for the European operations, to make it more integrated. Therefore, most of the coking coal will find its way to the European plants."
Tata Steel has 35% stake in the Benga project with the rest being with Rio Tinto. The company has a 40% off take agreement with Rio Tinto. This means that Tata Steel will own 40% of the total coal mined out of the Benga mines.
According to the mine plan, the first phase of the project will see mining of 5.3 million tonne of run of the mine a year. This translates to 2 million tonne of coal every year, or, 1.7 million tonne of hard coking coal. Coking coal has less ash content and is used in making steel. The 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 of the project. The mining capacity is planned to double, at 10.6 million tonne in this stage. The last and the final stage will see the mine producing 20 million tonne of run of the mine coal every year.
Kohler said, "The uncertainty elements will dominate the market. The sentiments are worse than the real underlying situation. We are looking at a rather difficult quarter going forward."
An analyst tracking the company said, "Although the initial coal from the Benga project won't give much cushion to the company but is a start. Its a long term project and is very crucial for the company."