Global Steel owns 70 per cent stakes in iron ore mine in Brazil and two coal mines in Columbia and Mozambique. The company is setting up three special purpose vehicles for isolating financial and regulatory risks. Ispat will purchase the stakes in these SPVs, which are held by Global Steel.
The iron ore mine has an estimated reserve of 500 million tonne while the coal mines hold reserves of 120 million tonne.
The stake buy will help the Indian company meet its requirements of the raw materials in India, especially when rising prices cut its margins. Earlier, when Global entered into multiple lease agreements with the respective governments for mining, the group's plan was to sell the raw materials in the international market.
Now, Ispat feels that their expansion plans would be delayed if it could not reach raw materials for the projects, said sources. Ispat Industries officials declined comment on the development.
"Despite soaring freight cost, which accounts 60 per cent of the landed cost of iron ore and coal, Ispat decided to bring the raw materials from its overseas mines to India. This shows the urgency in accessing raw material for their expansion plans," said an industry analyst.
Ispat, which produces 3.6 million tonne steel a year, is planning to raise its capacity to 10 million tonne by 2014. The company had already announced its plans to take its capacity to five million tonne in the next two years. The overseas mines are expected to take two to three years to begin production.
Until then Ispat will continue buying iron ore from National Mineral Development Corporation (NMDC) for their plants in India. Ispat, which scouts for coal mines in India, has bought five million tonne iron ore last year from NMDC.
Currently in the spot market, the iron ore prices are ruling at $200 a tonne, while coal prices are about $400 a tonne. According to industry estimates, the long term contract prices of iron ore are expected to jump 70 per cent this year. As per the thump rule, for the production of one tonne steel requires 1.7 tonne iron ore and 1.4 tonne coal.
