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Business News/ Companies / JSPL reopens Mozambique mines to tap rising coking coal price

JSPL reopens Mozambique mines to tap rising coking coal price

JSPL, which is in the process of selling some power assets to cut debt, expects the rise in coking coal prices to help improve the performance of its mining operations

Photo: BloombergPremium
Photo: Bloomberg

Jindal Steel and Power Ltd (JSPL) has reopened its mines in Mozambique from 1 October as the price of coking coal, used in steel production, has surged because of supply cuts in China.

The company, which is in the process of selling some of its assets in the power sector to reduce over Rs40,000 crore of debt, expects the rise in coking coal prices to help improve the performance of its mining operations in the second half of the year.

JSPL, which has mining, steel, power and construction businesses, had reported a consolidated loss of Rs1,082 crore for the June quarter, double the loss it had reported in the year ago period, mainly on account of nearly flat demand for steel and high financing costs.

Ravi Uppal, managing director and group chief executive officer of JSPL, said its unit JSPL Minerale Mozambique LDA has restarted mining operations at the Chirodzi Mines in Tete Province in Mozambique as the global price of coking coal, also known as metallurgical coal, has risen by more than 150% since August. JSPL expects access to own coking coal will also give its steel output a competitive edge. India has no coking coal reserves and the entire requirement is imported from markets such as Australia, Canada and Africa.

“Prime hard coking coal (a grade) was in the range of $85 in August. Today the same is being sold at $215 per tonne. Metallurgical coal accounts for a fifth of the cost of making steel and has a direct impact on the price of steel. Steel price is set to go up," said Uppal in an interview. JSPL has 4.75 million tonne a year steel capacity in India and a 2 million tonne capacity in Oman.

While the increase in the price of coking coal in world markets is welcome news for miners, passing on the increased cost of coal may not be easy for domestic steel producers in the face of cheap steel imports from China and from countries with which India has free-trade agreements such as Japan and South Korea.

“Coking coal price has been volatile recently and has witnessed an unprecedented increase since August 2016. Any sustained increase will erase existing thin operating margins of steel producers and further complicate logistics and supply chain management decisions," said Hemal H. Shah, partner, advisory services, EY. Many Indian steel companies are dependent on coking coal from China and it is to be seen whether this price ($215 per tonne) continues to appreciate further creating more uncertainty, added Shah.

Domestic primary steel producers (those who make steel from iron ore) have been depending on protectionist steps taken by the government to sail through a period of excess steel production capacity worldwide. These include imposing minimum import price for select steel products and enforcing a 30% export duty on iron ore exports meant to ensure raw material availability to primary steel producers. Downstream user industries of steel (including secondary steel producers) have been resisting these steps as it impact their raw material costs.

“The protectionist duties on hot rolled coils and plates have led to a situation where import duty on raw materials is higher than that on finished products. As a result, import of steel-based manufactured items have gone up while import of hot rolled coils and plates has declined between June and August. It adversely affects the Make in India drive," said S.C. Mathur, executive director of Cold Rolled Steel Manufacturers Association of India.

Uppal of JSPL, however, believes that in the second half of the year, the steel industry is expected to do better. “Demand will go up by 4-5% this financial year. In the first two quarters, it was just 0.5%. In the second half, it is expected to go up by 8%. The industry’s fundamentals are strong. It is just going through a low point," he said.

JSPL’s Mozambique mine, acquired in 2011, was put under care and maintenance early this year due to a progressive fall in the price of coking coal, which forced global mining majors to close down mines. The company’s mines in Australia have extractable coking coal reserves of 250 million tonnes, while the mines in Mozambique have extractable reserves of 450 million tonnes, a fourth of which is coking coal. The company is currently in the process of selling its 1000 MW power plant at Raigarh in Chhattisgarh to Naveen Jindal’s brother Sajjan Jindal for 4,000 crore to Rs6,500 crore, depending on the plant securing a power purchase agreement within a specified time.

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Gireesh Chandra Prasad
Gireesh has over 22 years of experience in business journalism covering diverse aspects of the economy, including finance, taxation, energy, aviation, corporate and bankruptcy laws, accounting and auditing.
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Published: 11 Oct 2016, 12:42 AM IST
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