Steel firms don’t get ample coal, blame the distribution system

Steel firms don’t get ample coal, blame the distribution system
Comment E-mail Print Share
First Published: Sun, Jul 08 2007. 11 58 PM IST
Updated: Sun, Jul 08 2007. 11 58 PM IST
During a recent coal sale, Bhushan Steel Ltd applied for 160,000 tonnes of coal through an intermediary. It ended up with just 7,000 tonnes, enough to last it for three days at the most.
Surging demand for coal is creating a scramble among steel producers, but proving lucrative for those in the business of coal trading.
In last month’s online sale of the commodity, the Rs4,200 crore Bhushan tried to book coal through two traders, Metal Scrap Trading Corp. Ltd and Coaljunction.com.
Nearly half a million tonnes (mt) were up for sale, but demand for domestic coal was nearly 20 times at 9,209,070 tonnes. Hundreds of bidders paid an average Rs7 lakhper rake (3,500 tonnes)—or Rs200 per tonne—as theirearnest money deposit to secure supply.
Depending on the grade, Indian coal costs Rs675-2,300 per tonne, cheaper than coal imported from Indonesia and Australia, priced an average Rs2,100 and Rs3,600 a tonne, respectively.
But in the end, steel manufacturers such as Bhushan were left with no choice but to pay a 22-33% markup to coal traders who bid for the commodity along with steel makers and acquire it the same way—through e-trading agencies authorized by coal producer Coal India Ltd.
Indian coal sales remains controlled by the government and follows a complex “linkage” system that favours certain sectors and older players. Because of newer manufacturers’ troubles securing coal, steel makers are calling for changes in distribution.
“The government must ensure that the coal first comes to the actual users as our cost of production goes up,” said Anil Ahuja, vice-president of Bhushan, which is partially operating a 3mt a year plant in Orissa.
“Most of the coal lots go to traders instead,” he added.
The prices are also having an effect on India’s booming coal-based sponge iron plants, where half of India’s 44mt of steel is made.
As expanded infrastructure and construction projects fuel demand for steel, sponge iron mills have mushroomed across the country. By one estimate, there are nearly 500 sponge iron units across India.
The coal-based sponge iron industry is cyclical in nature and its prices are affected by steel price cuts as raw material costs remain constant. Rates of sponge iron fell 6.1% from Rs13,800 a tonne to Rs13,000 a tonne after the Steel Authority of India Ltd reduced prices for its steel grades on 1 July in response to a slowdown in demand during monsoons.
“Only when coal supply is increased and iron ore supply is secure will margins improve,” said Naveen Vohra, an associate director at audit firm Ernst & Young who tracks the steel and coal industries.
India is the world’s third largest producer of coal, and follows a quota-style linkage system, distributing first to core sectors such as power,cement and fertilizers, and then to steel.
Of the 400mt production at present, the steel industry gets 15 million tonnes, which according to an official in Coal India, is shared among 200-odd steel companies.
A committee at the coal ministry sits every quarter to allot linked coal to individual companies but in the last two years, no fresh allotments (or linkages as they are called) have been given to steel units, according to N.C. Mohanty, adviser to the Sponge Iron Manufacturers Association.
The remaining coal is put up for online sales and priced 20% higher, mainly to cater to companies without linkages,where demand far outnumbers supply.
India imports 32mt of coal, but Mohanty said the option is costly for sponge iron units. “The government must give us assurance of supply. The industry is ready to purchase it from the government at an extra cost.”
The government’s new coal distribution policy, mandated by a Supreme Court order in December last year, proposes to remove the linkage scheme, which divides the industry into core and non-core sectors, and pave the way for a newer e-marketing regime.
The shortage of coal has also forced companies to run their plants at restricted capacity.
The Kolkata-based Adhunik Group applied to the government for coal supply two years ago. The requirement for its two plants—a 2.2mt a year plant in Jharkhand and a 50,000 tonnes a year plant in Orissa—is roughly 2,900 tonnes per day.
Both the plants started on schedule in the beginning of 2005, but the company managed to secure only half its coal requirement.
“What we need really is a more liberal policy which assures a secure supply to plants that are already in operation,” said Nirmal Agarwal, the director of the company, which buys coal at a 33% premium.
To curb multiple online registrations by traders, Coal India has put a new rule to curb traders from applying more than once from the same place. However, steel makers say the practice persists as the sales are based on booking on a first come, first served basis in the first 15 minutes of the sale opening.
At present, only sales tax registration is required to participate in online sales. Partha S. Bhattacharya, chairman of Coal India, which fixes coal prices, said the demand for coal has primarily been created because of a huge difference in prices between domestic coal and the imported variety. He said fewer complaints were received with the previous system.
“At present, we have the e-booking system, which is not an optimum policy as customers get coal on a first-come-first-served basis,” he said.
Comment E-mail Print Share
First Published: Sun, Jul 08 2007. 11 58 PM IST