Steel Output in India May Drop on Australian Floods

Jan. 13 （Bloomberg） -- Tata Steel Ltd., Steel Authority of India Ltd. and local rivals may cut output and raise prices as floods in Australia disrupt coking coal supplies and boost costs, RBS Equities India Ltd. and Macquarie Group Ltd. said.

Stoppages in coal shipments from Queensland state under force majeure clauses are likely to create a shortage in the April-to-June quarter, forcing steelmakers to lower production, RBS Equities analyst Rahul Jain said, without giving estimates. Steelmakers may also raise prices to cover cost increases, said Rakesh Arora, an analyst at Macquarie Group Ltd. in Mumbai.

The worst floods in 50 years in Australia’s largest coal exporting region is creating a raw material shortage in India, where steel demand is forecast to grow 10 percent in the year to March 31. Profit margins at Indian steelmakers may shrink more than 10 percent next quarter because of an increase in fuel costs, said Giriraj Daga, an analyst at Nirmal Bang Securities Ltd. in Mumbai.

“There will be a global shortage of coking coal as no ships are moving from Queensland,” said S.K. Sinha, a director at Saurashtra Fuels Ltd., which is developing a coking coal mine in Queensland. “The shortage will continue for at least 10 weeks, assuming things start getting better from here.”

Shares of Tata Steel fell 1.8 percent to 637.55 rupees at the 3:30 p.m. close of trade in Mumbai. Steel Authority dropped 2.7 percent to end at 172.30 rupees. The benchmark Sensitive Index of the Bombay Stock Exchange fell 1.8 percent.

Insufficient Supplies

Local steelmakers are likely to use up their coal stockpiles to meet orders that peak in the January to March period, leaving them with insufficient fuel supplies for the next quarter, said Sinha, whose company is India’s second- largest merchant producer of low-ash metallurgical coke and owns half of the development at Dysart, Queensland.

Queensland, which accounts for about 20 percent of Australia’s A$1.3 trillion （$1.3 trillion） economy, is losing A$480 million a week in coal exports, said Mark Pervan, head of commodity research at Australia & New Zealand Banking Group Ltd. in Melbourne. Australian coking coal rose to $265 a metric ton on average last week from $248, according to Petersfield, England-based researcher IHS McCloskey.

India’s government may discuss the coal supply situation arising out of the floods in Australia, G.K. Basak, executive secretary of the steel ministry’s joint plant committee, said in an interview, without giving details.

Return to Record

Contract coking coal prices, which reached a record $300 in 2008, may return to that level, Colin Hamilton, a London-based analyst at Macquarie Group, said last week. That is more than a 33 percent increase from the average $225 this quarter.

Sanjay Choudhry, a spokesman at Tata Steel, India’s largest steelmaker, didn’t respond to e-mailed questions on production, prices and profitability. Steel Authority of India Ltd. Executive Director A.K. Pandey declined to comment the company’s prospects of facing a coal shortage in April.

Indian steelmakers are trying to seek more coking coal supplies from the U.S. and Canada to help them tide over a possible shortage, Basak said.

JSW Steel Ltd., India’s third-largest producer, will require 40 percent more coking coal in the next fiscal year as it raises capacity, according to Chief Executive Officer Vinod Nowal. The company, which sources about 80 percent of its coal supplies from Australia, is scouting for suppliers in the U.S. to hedge against any shortage, Nowal said in an interview yesterday. JSW doesn’t expect any cut in production, he said.

Impact in April

“Most of the companies would have coking coal stocks of up to a quarter so the impact on production due to high prices and lower supplies would largely come from April,” said Macquarie’s Arora, who has “outperform” ratings for Tata Steel and JSW Steel.

Tata Steel’s European unit may lower production next quarter as it is fully dependent on coal from external suppliers, mainly in Australia, Nirmal Bang’s Daga said.

“The freight rates have fallen after the Queensland floods so it won’t be very expensive to secure coking coal from U.S. or Canada,” said Neeraj Singal, managing director at Bhushan Steel Ltd., an Indian steelmaker that buys as much as 1 million tons of coking coal annually. “We are discussing to get supplies even at a higher price from the U.S. to keep our plant running at full capacity.”

Cargo Volume

The Baltic Dry Index, a measure of dry-bulk commodity- shipping costs, fell to a 21-month low as flooding in Australia shut mines and halted railroads, curbing volumes of cargo to be delivered.

The index declined 15 points, or 1 percent, to 1,480 as of Jan. 11, according to data from London’s Baltic Exchange. The drop was the 20th in a row. Daily rents for capesize ships, the biggest tracked by the gauge and typical haulers of iron ore and coal, lost 5.3 percent to $11,266, a two-year low.

There are 132 vessels moored off Queensland, accounting for about 50 percent of the global seaborne supply of coal used in steelmaking, data collected by AISLive and compiled by Bloomberg show. Ships will wait at least 22 days to load, the longest delays since April, according to Truro, England-based Global Ports, which tracks the industry.

Steel Authority, India’s second-biggest producer, is paying 8 percent more, or $225 a ton, for coking coal this quarter, Chairman C.S. Verma said on Dec. 29. The company plans to import as much as 11 million tons of coal this fiscal year, about two- thirds of its requirement.

--Editors: Indranil Ghosh, Abhay Singh