COLUMN-India, not China, steel output to drive coking coal: Clyde Russell

Tue Nov 27, 2012 12:38am EST

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--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, Nov 27 (Reuters) - While Asia's market for thermal coal appears structurally oversupplied, the opposite may be true for coking coal, where rising Indian steel output is likely to lead to a deficit in the next few years.

China tends to be the focus of the steel market given its status as the world's largest producer, but India is likely to take over the mantle as the fastest-growing producer of the metal within the next few years.

India's steel capacity could almost triple between 2010 and 2020 to reach 179 million tonnes a year, Somdeb Banerjee, Tata Steel's executive for South Africa, said last week at the Coaltrans Mozambique conference in Maputo.

While this pales in comparison to China's current capacity around 850 million tonnes, it's likely that China's steel-making binge is over given its market is already oversupplied.

This means China's steel-making capacity is unlikely to rise much above 1 billion tonnes in the next few years, which will limit its need for coking coal supplies.

It's also likely that China's additional coking coal demand can be met from neighbouring Mongolia, which is bringing new mines into production and currently lacks the infrastructure to send the coal anywhere other than China.

But India is nowhere near as lucky as China in having a captive coking coal supplier on its doorstep, and the South Asian nation will increasingly have to rely on seaborne imports to meet its demand for the steel-making ingredient.

India imported 31.8 million tonnes of coking coal in the last fiscal year and this may rise to at least 37 million tonnes in the current year.

Domestic coking coal output is unlikely to rise in the future, given India's reserves are biased toward lower-rank thermal coal.

Given that about 770 kilograms of coking coal are required to make one tonne of steel, India's planned capacity growth will require significant coking coal imports.

While all the capacity may not be used, even a 50 million tonne increase in steel output will translate to about 39 million tonnes in additional demand for seaborne coking coal within the next few years.

This is just the Indian picture, and even assuming that China doesn't import demand any more than its current 37 million tonnes from the seaborne market, it's possible that other developing nations will also increase steel output, and by more than any declines that may occur in Europe.

The question then becomes: are the world's miners able to meet the potential demand for coking coal that may materialise before 2020?

Here the answer becomes trickier, because on the surface there appears to be enough supply being developed.

But, and it's a big but, new mines and related infrastructure are now highly capital intensive to build and are often challenging to build, factors that more often than not result in long delays and cost overruns.

A case in point is Mozambique, the big hope for future coking coal supply.

While the southern African nation has ambitious plans to export as much as 100 million tonnes of coal in the next decade, it would be something of an engineering and financing miracle if all of this happens on time.

Among the major projects underway are mines by Brazil's Vale , which aim to eventually producer 8.5 million tonnes a year of hard coking coal, and Rio Tinto's two mines, planned to eventually produce about 25 million tonnes of coking coal.

Other projects include those of Jindal Steel & Power , Beacon Hill Resources, ENRC, Nocondezi Coal and a venture involving Talbot Group, Nippon Steel, POSCO and Anglo American .

Mozambique's coal exports from its own mines are expected to be around 4 million tonnes this year, showing just how far the country is from achieving its aims.

The main problem is a lack of suitable rail and port infrastructure.

While these issues can be overcome, the plans to refurbish existing two rail lines and build another have been slow to progress.

The improvement of the existing 570 kilometre Sena line, which links the coal mines in Tete province to the port of Beira, is behind schedule but should be largely finished by the end next year.

The other existing line through Malawi needs extensive rehabilitation and a new line around the bottom of Malawi to the port of Nacala is still in planning stages.

Both of these railways would be around 1,000 kilometres long and have to pass over mountains and across floodplains, adding to cost and complexity.

What this means is that Mozambique's coal output should rise to about 20 million tonnes within the next two years as the Sena line ramps up, but then may flatline for several more as the infrastructure is put in place.

If Mozambique isn't going to supply India's coking coal needs, then the next best bet is Australia, already the dominant force in the seaborne trade, with shipments this year likely to total about 162 million tonnes, well ahead of the 58 million tonnes by the United States and the 31 million tonnes by third-ranked Canada.

But Australian producers are also under the cost-pressure gun, with Marius Kloppers, the chief executive of number one BHP Billiton, saying last month that it was hard to justify expanding coal mines in the current environment of lower prices, higher taxes and royalties and a strong Australian dollar.

BHP has put its Peak Downs project in Australia's Queensland state on hold, and has urged the state and federal governments to work with companies to make them more competitive.

Of course, there would be nothing like increased demand for coking coal and limited available new supply to drive the price higher, which in turn would make new projects more attractive.

Coking coal prices are currently around half of the more than $300 a tonne peak reached in the aftermath of the late 2010 Queensland floods, which severely curtailed output.

If India's planned steel capacity comes on line before the new coking coal projects, it's quite possible prices will once again return to near record levels in the next few years.

(Editing by Miral Fahmy)

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