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Business News/ Opinion / Online-views/  Tata Steel: the money looks good; now to get the coal
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Tata Steel: the money looks good; now to get the coal

Tata Steel: the money looks good; now to get the coal

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Tata Steel Ltd’s desire to secure coking coal and iron ore supplies was to protect itself from wildly fluctuating prices. Rising prices have helped only large global miners such as Rio Tinto Plc and BHP Billiton Ltd.

An unequal market structure means coal and iron ore companies increase prices almost at will; but a fragmented steel industry is unable to do the same. This plays havoc with margins, as seen in the past few years.

It must have been galling, therefore, for Tata Steel to see Rio Tinto acquire a majority stake in Riversdale Mining Ltd, the Australian coal company with prized African mining assets. The Indian steel company was an early investor in its projects, funding its mine development costs.

Tata Steel’s eventual exit from Riversdale was to be expected, after Brazil’s CSN sold its 19.4% stake to Rio Tinto, whose stake then increased to 73.2%. The Tatas were left with a 26.3% stake, and a negligible public holding. Rather than own shares in an unlisted company, Tata Steel did the prudent thing of selling out. Its statement said it did not want to own a stake in Riversdale without having a joint venture agreement with Rio Tinto.

The sale consideration is adequate consolation for the moment. Its stake has netted it Australian $1.06 billion, or around 5,100 crore. The value has doubled in around four years, and the surplus (after repaying any acquisition-related debt) can be used to fund its own expansion plans.

The gains will also help offset any exceptional losses such as expenses that will be incurred on its European long steel restructuring proposal.

But the bigger issue really is whether Tata Steel will get all the coal it wants from Riversdale. Rio Tinto will want to maximize price realizations, while the steel maker’s intention will be to lower its raw material costs.

Tata Steel continues to own a 35% stake in a joint venture with Riversdale, to develop a coal business called the Benga project in Mozambique.

It has a 40% life-of-mine offtake agreement for coking coal with Riversdale. In the first phase, the Benga project is expected to produce 5.3 million tonnes (mt) of ROM coal. Run of mine (ROM) refers to the coal output, before it is processed. The final output is expected to be 1.7 mt of hard coking coal and 0.3 mt of thermal coal.

The first phase is due to start by the end of this year and will expand in two more phases to 20 mt of ROM by 2013. In early 2012, Tata Steel will be able to report coking coal shipments to its steel plants from Mozambique.

While Tata Steel had also wanted to expand its relationship with Riversdale to other mines, that now depends on Rio Tinto. Tata Steel said it will discuss, in good faith, ways to enhance its participation in the Benga joint venture, based on the framework captured in the original agreement.

The Indian steel company’s investors will be happy if it gets its full share of coal and the Benga project scales up as scheduled.

Apart from ensuring supplies, it will protect the company from raw material price volatility—both coal and iron ore—which often plays havoc with earnings growth.

We welcome your comments at marktomarket@livemint.com

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Published: 19 Jun 2011, 09:43 PM IST
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