Coking coal jumps on China imports - Quoted in the DNA newspaper

A huge increase in imports by China, particularly from Australia has seen a spurt in coking coal prices. Spot prices of the commodity are ruling around $175 per tonne at present, compared to around $145 a tonne in August. And prices are expected to rise further, with analysts predicting $200 levels by 2011.

If that happens, it could be a double whammy for Indian steelmakers. Rising prices of coking coal could add to their woes of low prices of steel ruling at present.

An Indian steel producer, on condition of anonymity, told DNA Money, "We've been seeing this trend for the last few months as a lot of Australian coking coal is being exported to China. The Chinese buying is cause for concern. We can just hope that the trend is unlikely to sustain if many of the closed mines in China come back into operation." Arun Jagatramka, chairman, Gujarat NRE Coke, one of the largest coke producers in the country, told DNA Money, "China for the first time has become a net importer, which is having its impact globally on the prevailing short supply of good quality hard coking coal thereby causing a spiralling effect on international prices."

Jagatramka said there are two reasons for China's purchases. The first is the consecutive mine disasters that have occurred in recent past, which have shut down production.

Second, though China has huge resource of coal, there are constraints in quality. Trade estimates suggest China's coking coal imports between January and October increased to over 95 million tonnes, a more than 170% increase over the corresponding period the previous year. On the other hand, coal exports from China have decreased by over 50% over the year.

Dipesh Dipu, principal consultant, Pricewaterhouse Coopers, said, "Chinese buying of coking coal would definitely impact spot prices. Once prices go up, steelmakers would face increasing costs of production. It would then depend on whether steelmakers absorb the prices or pass it on to the customer."

Dipu said that prices of coking coal could go up to "$210-220 levels if the trend continues", and that "it could be a cause of worry to steel manufacturers who depend much on imported coal".

"Coking coal is one of the very few commodities whose prices were not affected by the recession. Ignoring last year's windfall, the present price is highest ever in history," Jagatramka said. Prices had shot up to $300 a tonne in 2008.

A recent report of Citi Investment Research & Analysis said that global coking coal prices are expected to harden further and reach $200 a tonne in 2010-11. The semi-soft variety of coking coal is projected at $120 a tonne, up from $100 a tonne. Driven by Chinese imports, prices of the sea-borne variety of coking coal have also increased to $160-170 tonne from $130 a tonne a few months back.

- Copyright of this article is with the DNA newspaper.

Tata to cut Corus flab; Teesside future bleak - Quoted in the Financial Express

As demand in Europe is yet to pick up, Corus’ Teesside casting plant leaves no choice for the Tatas but to mothball it. Tata Steel, India's largest and world's eighth largest steel manufacturer, said Corus' Teesside casting plant in the United Kingdom was a major drag on the company's profitability in Q2 of the current fiscal, and it was prepared to mothball the plant, if necessary.

Experts say there is no hope for Teesside and mothballing only suggests that the plant is not running at an economically viable condition. Kirby Adams, managing director and chief executive officer of Tata Steel Europe, revealed that walking away of four international partners from the annual contract resulted in a significant loss in cash and earnings for Corus.

Teesside's Ebitda loss in H1 stood at $220 million and cash outflow was $144 million, affecting profitability of Tata Steel. Tata Steel's shares on Friday were marginally up by 0.27% to close at Rs 544.90 on the BSE.

"In April this year, four international companies walked away from an annual contract to buy slabs from Teesside only after four years of performance. They walked away with more than $700 million profit in four years," Adams said.

Dipesh Dipu, principal consultant with PwC, said: "The termination of the off-take agreement certainly is a setback for the Teesside plant and it might have to look for strategic alliances for continued production."

The company has appealed in the court against the consortium of four companies for backing out of the TCP contract. The consortium included Marcegaglia SpA, Dongkuk Steel Mill Co, Alvory SA and Duferco Participations Holding Ltd.

These companies agreed in 2004 to buy 78% of the production of TCP under a 10-year slab off take agreement.

Meanwhile, Corus is also searching for other joint venture (JV) partners to either replace or replicate the similar kind of transaction. "We are in discussion with a couple of other parties which might or might not lead to a joint venture. We might take a decision by the end of this financial year," Kirby said.

Industry experts say the demand in Europe would take several years to return to previous capacity levels.

The company's European steel plants have been reducing production and capacity utilisation in view of lower demand. Analysts are predicting economic recovery not earlier than the middle of 2010. "The output is stabilising but at lower levels. The construction market in Europe is still depressed. But the company is seeing some stability in the selling prices going forward," said Adams. Tata Steel said in August that Corus had seen external orders picking up at Teesside cast products, where the order book is full till the end of October. It is confident that the business is in the best possible shape to benefit from a future increase in demand.

Mining financial markets for coal - My article published in the Financial Express

Coal mining industry is poised to play the pivotal rote in providing energy security for the economy. With expected demand of close to 2.34 billion tonnes per annum by 2031-32, which is about five times the current rate of production, private sector participation is inevitable. However, for this to happen, the financial markets need to evolve as well. Traditionally, coal mining by Coal India Limited has been equity financed, with a large proportion of the funding coming in from the accumulated profits or government’s budgetary allocations. A look at the typical tangible asset based coal mining process will indicate that such resource allocation strategy can hardly be called prudent. The tangible assets can easily be securitized and hence, debt at lower costs of funding may be utilized substituting equity. But the industry leaders have tended to compare the cost savings of debt funding with the post-tax income generated from the cash reserves that they tend to keep in banks’ fixed deposits. Such comparisons completely miss the concept of opportunity costs, where the same source of funding, adequately leveraged, could help open new mines.

However, the equation can not be solved that easily. For debt funding to flow, the banks and financial institutions need to comprehend the unique dynamics of coal mining sector. Bankers are observed to struggle even with the concept of stripping ratio in open cast mining, since the applications for funding have come their way only now when a few private sector entities have begun to make their presence felt.

For better equity markets, the coal mining companies need to be open to investments by public and their listing process itself is likely to educate the investors. CIL has proposed an initial public offer of its shares. With not many comparable stocks listed, there are likely to be issues in benchmarking multiples and arriving at prudent valuations. CIL may be expected to rank among the largest in the world in terms of market capitalization. However, to add greater depth to the equity market, the nine subsidiaries of CIL, which are mini-ratna companies, may instead be listed. This suggestion from the Indian Chamber of Commerce expressed at the Coal Summit 2009 may be examined in detail as this could lead to other benefits as well such as enhanced competition in the industry. There could be public float of Singareni Collieries Company Limited as well. The public shareholding of Neyveli Lignite Corporation, the only listed lignite mining and power generation company, can be enhanced. The private sector companies with coal mines and contract miners may also be encouraged to tap the equity market. All these put together can improve the visibility of the coal mining companies in the market, provide them with much needed funds, develop investor confidence including those of the lenders, and help accountability and transparency in the public policies pertaining to the sector.

Development of alternate investment markets, as those existing in the UK, Australia and Canada, may help financing of prospecting and exploration activities in the sector. A large number of coal blocks that are proposed for development are only partially and regionally explored, which, therefore, have the risk of delayed and subdued investments. The alternate investment markets can provide risk capital for activities such as exploration, resource investigation and proving reserves. This may also add to the market specialized participants whose business model involve risk taking, proving reserves and exiting at attractive valuations. With the National Mineral Policy proposing to add marketability to the prospecting licenses, this new dimension to the financial market seems closer to reality but for the creation of an alternate investment markets.

The coal mining companies need to improve their financial reporting to assist development of both debt and equity markets. The current format for financial reports leaves a lot to be desired and often times is no different from financial statement of a typical manufacturing company. Key assets of mining companies are the reserves which are depleting with production and may sometimes rise due to new discoveries or acquisitions. But the reserves and reserves-to-production ratios go unreported. These make fundamental analyses handicapped and largely dependent on trends in revenues and costs. Such analyses then tend to use greater discount rates to the assessed cash flows and hence, may result in lower than expected valuations.

Sustainability reporting can also help development of markets for coal mining industry. Although not mandated, the companies may produce these reports as a compilation of their efforts to meet governance, environmental and social expectations. These reports can be used to communicate with the stakeholders, including those providing sources of finance, and help in aligning risk perceptions. These efforts by the industry are likely to bear fruits and help the market participants securing finances to mine more coal to feed the growth engines of the economy.

Views on the Cement Sector in India - October 2009

1. What are the important factors that influence the cost of production in cement manufacturing?
Raw material costs are key to cement manufacturing. Many of the Indian cement companies own their captive limestone mines, where with new technologies, cost of mining can be within control. Apart from raw material costs energy cost contributes significantly to the cost of final product. Energy costs contribute about 26 - 61 percent towards total cost of cement production, depending upon the technology. Coal import prices have seen peaks in the past and likely to rise again in future, which are again likely to impact cost of manufacturing. Transportation costs also are significant contributors in costs, particularly for those plants which are located in the vicinity of raw material sources and have to transport cement to markets. Taxes and levies form another significant part of cost of cement. In India cement producers pay duties on power, tariff, sales tax, royalty and cess on limestone, coal, gypsum and also excise duty. In India taxes and levies for cement account for nearly 20% of the selling prices.

2. Logistics - how important is it? How much of making money in cement depends on logistics?

In India, increasingly cement producers may desire to locate their manufacturing units near the markets. Long distance transportation of cement is generally not common in India. Cement being a high bulk and low value commodity requires huge volumes in railway rakes and trucks and this may result in product being uncompetitive in distant markets. The higher cost of diesel may also be seen as having adverse impact on the demand for cement and hence, determine the preferred site and transportation strategy.

3. Today, Indian cement companies are trying to reach out to different markets and are thus setting up plants across the country. It sounds like a sound logic when done domestically. But how does it pan out when once does it internationally to hedge?

The foreign ventures may be from the geographical diversification perspective. It may be appreciated that other developing countries too have been observed to have higher focus on housing and infrastructure development. Also, availability of raw materials could be an important factor for development of cement manufacturing capacity abroad. Hence, developing countries with abundant limestone and coal reserves may be targets for expansion.
The strategy for foreign expansion may be in view of the market conditions in India. There are some views in the industry that consider the likelihood of Indian markets heading towards capacity surplus in view of announcements of capacity additions by most manufacturers. However, if Indian GDP is to grow at close to 7-8% per annum in the medium to long term, such surplus may not arise.

4. What are the risks of international marketing or having facilities across various international locations?

Political & legal risks are key in foreign ventures. These range from uncertainty of regulatory framework to concerns about nationalization, which have been observed in some developing countries. Concerns may also include business risks of quantum of demand and pricing, investment restrictions, taxation concerns and risks of restriction on financial resource transfers. There are also concerns of social engagements with people of different cultures, and managing such soft keys may be challenging at times.

(These are from my short interview conducted by Forbes India, part of which was used in their article in issue dated 20th November 2009.)