The shore-based location of the Rashtriya Ispat Nigam (RINL) owned Vizag Steel Plant (VSP) has been an advantage in terms of ingress and egress of raw materials and finished products. At the same time, the iron ore bearing states are so committed to local value addition that VSP is denied mine linkages.
As a result, RINL, unlike its peers such as SAIL and Tata Steel, which get full supplies of iron ore from their captive mines, not only gets a much higher bill for the mineral but is also exposed to an avoidable commodity risk. State level economic chauvinism will not allow RINL to come to own iron ore deposits within the country, however deserving the cause may be. But now as cash-strapped junior mining companies in Australia are desperately seeking funds for execution of large projects finalised before the financial meltdown began, a range of opportunities from straight buyouts to joint ventures are beckoning RINL.
What, however, the RINL management and more so our government will have to consider is that the forward looking Chinese focused on securing long-term resource supplies for their well over 500 million tonne steel industry have already struck some nice deals in the Australian mining space in recent days. Earlier, China acquired large chunks of iron ore, coal and copper ore deposits in African countries as a trade-off for liberal aid and commitment to build infrastructure. In fact, China’s success in Africa, including some of the most disturbed parts of the continent is a cause of discomfort to the West. Iron ore is a dry bulk commodity where haulage over long distances is an important cost determinant. Being shore based and now with the added advantage of the virtual captive Gangavaram port with a deep draft of 21 metres, RINL will perhaps have a logistical and also cost edge if it starts using Australian ore. As of now, RINL gets all the ore it needs from NMDC’s mines at Chattisgarh.
In the making of steel, iron ore is the biggest cost element. RINL chairman P K Bishnoi has told us that it would be possible to house steel making capacity of 20 million tonnes in the 20,000 acres in possession against 3.6 million tonnes now if the company is allowed to do compensatory plantation 50 km away from the plant site.
But as RINL is marching towards capacity of 6.8 million tonnes in the first phase of expansion, Bishnoi’s concern is to insulate the company from the volatility in the prices of iron ore. Having drawn a blank in acquiring mineral assets here, Bishnoi sought a union with NMDC. The move, despite all its merits, is a non-starter.
Therefore, one option Bishnoi is left with is to look beyond the shores in Australia wherefrom iron ore could be cost-effectively shipped to Gangavaram port designed to accept very large vessels. On behalf of Coal Ventures International, a special purpose vehicle of five PSUs, including RINL, Bishnoi is engaged in scouting for coking coal assets. He, therefore, has the benefit of skills to look for opportunities in iron ore domain in Australia.
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In case Bishnoi and other Indian steel groups decide to embark on cherry picking in the Australian iron ore sector where groups are strapped for cash to see through new mining projects, they will have to remember that China is already playing the role of white knight there. In a turnaround of Canberra’s disposition to foreign investment proposals in the resources sector, China’s courting of Australian mining companies is now meeting with official sympathy.
This, however, could not be otherwise. As late as 2008 July-end, mining groups were walloping steel makers and they could demand fancy prices from potential bidders. But even when interest was shown in resources companies, particularly by Chinese groups, the Australian Foreign Investment Board would indefinitely be sitting on the proposals. Suitors were given to understand that all takeover and JV proposals must pass muster of Australian national interest.
PIB cannot any longer afford to be overly choosy when mining groups are desperately seeking funds and investors from China are ready to play the role of white knight. Gindalbie Metals of Australia will get $107 million by way of placing shares to AnSteel of China. The deal will also facilitate Gindalbie’s borrowing of up to $1.2billion China Development Bank for execution of an iron ore project in western Australia. It is no brain-teaser that as part of the deal An Steel has secured favourable long-term agreements for offtake of Gindalbie’s iron ore from existing operations and also from the proposed new mine development.