The Telegraph
Since 1st March, 1999
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Steel makers hauled over coals

Calcutta, June 23: Steel companies are heading for yet another spurt in input costs with Australian firms planning to increase coking coal prices by over 30 per cent.

Although Steel Authority of India (SAIL) and Vizag Steel Plant (VSP) have already signed one-year contracts with Australian companies from April this year, prices in the spot market could go into a tailspin in the short term.

Big steel companies are forced to buy coal from spot markets abroad when they face supply disruptions. The smaller ones, who do not have the financial muscle to strike deals with global mineral giants, are forced to procure the feedstock at current prices.

“SAIL and Vizag Steel, which depend largely on imported coal, will be scorched after their current contracts expire next year,” an analyst said.

Merrill Lynch & Company, the global investment bank known for its extensive research in this area, has predicted that contract coal prices will jump over 30 per cent. For thermal coal, the increase could be 10 per cent.

While this will burn a big hole in the earnings of coal-driven companies, BHP Billiton and Rio Pinto will be laughing their way to the banks. The Australian majors are among the biggest suppliers to Indian steel companies.

According to Merrill Lynch, the planned price increase could boost Rio Pinto’s bottomline by 8.8 per cent and BHP Billiton’s net profit by close to 8 per cent.

The Australian firms recently raised contract prices by over 20 per cent. Indian steel companies, having entered into deals already, will not be immediately hit, but will have to shell out more under new pacts.

Sources said the situation has worsened with China reducing coal exports for the current year from 100 million tonnes to 80 million tonnes. The steel industry there is also reeling under soaring coal costs. Beijing has ordered an immediate abolition of local charges and taxes on the coal business to limit the spike.

Last week, the state department of China’s reform commission sent a circular abolishing all administrative charges not levied by the central and provincial governments.

A senior official of the Indian Steel Alliance (ISA) said similar steps are needed here to soften the impact of the coal-price blow. He suggested that freight charges for moving coking coal within the country should be reduced.

“The surging coal prices will spell disaster for many companies. The government should understand the gravity of the situation and offer solutions,” he added.

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