Reliance on imported coking coal often poses challenges for India’s steel mills which, unlike their peers in China, have limited domestic reserves.
India, which overtook Japan to become the world’s second-largest steel producer in 2018, is slated to become the top coking coal importer 2020.
Of the Indian steelmaker’s current group-wide capacity of 33 million tpy, 44% is at its European operations in the Netherlands and the UK. The remaining 56% - or around 18.5 million tpy - which includes capacity at the recently acquired Bhushan Steel, is in India.
The company’s raw materials portfolio includes annual requirement of around 19 million tonnes of coking coal, 16 million tonnes of iron ore and 0.5 million tonnes of coke.
Managing Australian supply risks
With bulk of Tata Steel’s coking coal coming from Australia, any disruptions to supplies from the country is a matter of concern.
Sinha, who has been in the commodities market for three decades, said that Australian coal prices had seen a lot more volatility historically than those in the United States, with spot trading relatively muted in the US.
Two causes of that volatility include the weather in Australia and, more recently, logistical bottlenecks caused by disruption at ports or on transportation links across the Central Queensland Coal Network.
Sinha said there are ways to manage risks associated with the weather.
“Buyers can carry more inventory during the wet weather season in Australia, which is typically from January to March,” he said, adding that buying from sources apart from Australia was also an option.
He further said that there was also an increasing trend for sellers to manage inventories closer to the customer to mitigate risks associated with supply chain disruptions, citing concerns last year about transportation of coal on the Queensland rail network.
Those concerns stemmed from a disagreement between Australian rail freight operator Aurizon and the Queensland Resources Council (QRC) over the terms of the 2020 Draft Access Undertaking - the next version of the rulebook that governs the Central Queensland Coal Network.
In February 2018, Aurizon said that it might need to reduce throughput by 20 million tonnes per year to meet the requirements of the 2020 Draft Access Undertaking.
Some sellers in Australia highlighted problems with rail allocations following the dispute between Aurizon and QRC and said their ability to offer spot cargoes had been affected as a result.
Earlier this month, Aurizon reached an agreement over the access undertaking with its customers, and is awaiting the agreement of the QRC.
Sinha said that some vendors are now carrying inventories closer to the customers because it gives sellers assurances about sales even during times of disruption in Australia, and it allows consumers to draw on inventories on an as-needed basis.
“This system works as long as the customers provide assurances about payment [because] both sides want to de-risk their businesses,” he added.
Logistics apart, Sinha also said that the company continues to look out for investments in mining assets to ensure stable supplies.
“We won’t invest [just] for the sake of it,” he added, “[But] risk mitigation is possible through long-term offtake agreements and other means, [so,] at the right price, we are not averse to investment.”
Following the 2017 disruptions to Australian coking coal supplies caused by Cyclone Debbie, resource diversification has been a key focus for steel mills outside China.
Sinha said that with Tata Steel’s steelmaking operations based in Europe and India, the company have a natural hedge amid access to coal from countries such as US, Australia and Russia.
“The top risk for us is the volatility in prices, [because] it is not [always the case] that the raw materials’ prices or their volatility will transfer to steel prices and that can result in a margin squeeze,” he said.
Tata Steel's concerns over margin squeeze are more pronounced in Europe where the company does not have captive raw materials’ sources for either iron ore or coking coal.
“In Europe, spread management is the key, so we try to align... our raw materials purchase contracts with the downstream contracts,” he said.
In India, the price volatility is safeguarded due to Tata Steel’s captive iron ore mines.
“This means that, compared with our competitors in India, we are better at managing raw materials’ price risks in the country,” he said.
He said the gap in the prices of steelmaking raw materials, such as coking coal or iron ore pellets in the Atlantic and Pacific markets was also a risk, but added that it presented Tata Steel with an opportunity to take advantage of changes in trade flows when spreads become wide.
The company is also open to using derivative contracts offered by Singapore Exchange (SGX) to mitigate risks associated with its raw materials costs.
SGX accounts for the most-widely traded ex-China coking coal and iron ore contracts.
A total of 161 million tonnes of iron ore contract, up 71% year-on-year had traded on the exchange in April, and traded volumes for coking coal stood at 0.72 million tonnes last month.
Logistical constraints in India
Much talked about constraints with regard to supply assurances for Indian steelmaking raw materials' buyers, stem from the limited infrastructure for the internal movement of raw materials and finished products in the country.
Amid plans to grow steel production in India, the development of robust logistical infrastructure is an important area of focus for Tata Steel.
Although the transport of iron ore from Tata Steel's own captive mines in India was not an issue, Sinha said there were problems with the infrastructure connecting the ports to the steel plants.
“In any developing country, usually the demand for infrastructure will grow at a faster pace than the pace of infrastructure development,” he said, adding that efforts were now being made to improve the logistics infrastructure for steel mills.
“For example, through the own-your-wagon scheme, mills are encouraged to own the rolling fleet [and] that makes availability of wagons easier,” he said, adding that India's inland waterway network was another area that has not been full exploited yet.
"Once the availability of wagons improves, you will see more coastal movements of cargoes as well,” he added.
So while per capita steel consumption in India still lags the more mature economies such as US and those in Europe and is also behind the world’s top consumer of steel, China, all these efforts to reduce supply side risks stem from the expectation that India’s steel sector will continue to see healthy growth in the years ahead.
Speaking ahead of Singapore Iron Ore Week, Tata Steel's director of raw materials procurement, Ranjan Sinha, told Fastmarkets how the company manages its raw materials supply risks.