InvestorQ : Why are the steel companies asking the government to intervene in coking coal prices?
swati Bakhda made post

Why are the steel companies asking the government to intervene in coking coal prices?

Sam Eswaran answered.
1 year ago

Remember, coking coal is a very important ingredient in the manufacture of steel. Now there are two problems that are key here. Firstly, the price of coking coal has gone up by nearly 200% in the last 1 year and that has put pressure on steel companies. That is because every 1 tonne (1000 KG) of steel produced requires coking coal consumption of 600 KG. That is making steel prices almost unremunerative at this juncture. That is why the demand has come from the lobbying body i.e. the Indian Steel Association.

Here is the major demand. The Indian Steel Association (ISA) has seriously sought the intervention of the government to keep a check on the prices of coking coal. Just look at the price to understand the magnitude of the problem. The price of coking coal is up 3-fold in the last 1 year from $130/tonne to $450/tonne. It had recently peaked out at $670/tonne before correcting. Currently, India meets 85% of its coking coal via imports mainly from Australia. That is what is making the situation rather sticky for steel manufacturers.

Let us understand the steel making process. Currently, coking coal is used as a fuel for blast furnaces. Currently, 70% of steel in India is manufactured using the blast furnace technology and only the balance 30% is manufactured using electric arc furnace method. Nearly 70% of steel companies therefore rely on coking coal to fire blast furnaces. TO make 1 tonne (1,000 KG) of steel requires about 600 KG of coking coal. India is the second largest steel maker.

A quick word on the process. Coke is made by baking coal without oxygen to remove volatile hydrocarbons. That makes coke strong, porous, and chemically reactive. These qualities make it a natural fit for stable blast furnace operation. The only downside risk in coking coal is that it is very hazardous environmentally. That is the reason very few countries are able to produce coking coal in large scale, and so dependency is heavy on Australia for coking coal.

What does this spike mean for cost of steel. Let us take an illustration. The current price of coking coal is $450/tonne, so the cost of coking coal in 1 tonne of steel is almost Rs30,000 considering the ratio of 600 KG per tonne of steel. That is not all. There are other inputs in steel making like iron ore, ferro alloys etc. There is additional cost in fuel, logistics etc. IF you also add the crude effect, it does make steel rather uncompetitive.

To sum up the story, coking coal and iron ore are the two key raw materials used in steel making. Iron or is available domestically, but India imports 85% of coking coal needs from Australia and Russia. ISA has alleged cartelization but that is not required for a commodity that is scarce. Also, it is not too clear how the government can intervene and solve this problem since global prices are outside the purview of individual governments.