Indian demand for South African coal is set to drop, threatening sharply lower prices, as iron makers there cut back, hit by falling prices in the steel market they supply and rising costs for imported coal.
India’s sponge iron makers, who use coal as part of a process to make iron from ore, have relied increasingly on imported South African coal in recent years.
”We are in a situation of steel oversupply at present. At the same time the sponge iron plants who sell to the steel makers are being squeezed and trying to buy as little imported coal as they can,” one Indian trader said.
End-users in the sponge iron and cement sector are trying to eke out their imported coal stocks as long as possible, but will have to come back to the market by September.
India bought over four million tonnes of South African coal in the first half of the year, compared with three million for 2006 as a whole. The quantity imported in H2 had been expected to also be around four million tonnes but the total is likely to be less unless prices fall, traders said.
On Tuesday, Steel Authority of India (Sail), said it was cutting some products by 500 to 1 000 rupees with effect from July 1 to compete with lower-priced imports.
Other steel makers such as Tata Steel, JSW Steel and Ispat are expected to announce similar cuts, Indian traders said.
”Steel prices for some flat products have fallen by around $50 a tonne [2 000 rupees] from around $650 during the past three months,” another Indian trader said.
Delivered spot coal prices have been in the range $84 to $90 CIF (cost, insurance and freight) for the past few weeks. During this time there has been limited Indian buying.
Indian coal traders said they have kept their spot buying to a minimum because they cannot sell to end-users at prices of $84.
Traders who bought and shipped South African coal when prices were at around $52 are able to undercut their competitors trying to sell fresh cargoes at $84 and above.
”The whole situation has slowed down. The sponge plants are struggling to sell to the steel mills and they’re being paid late. So they pay us late for coal. So we’re only giving them the minimum,” the first trader said.
Indian end-users in the cement and sponge iron sectors have been saying for two months that South African coal is uneconomic for them at prices of $85 a tonne CIF or more.
Traders have bought spot coal at prices of $84 to $89 CIF but are selling on to end-users at lower prices.
Current FOB (free on board) coal prices plus freights indicate spot CIF prices of around $90.
Indian spot buying of South African coal has been the main reason prices rose from $47 FOB in January to a high of $60,50 recently.
Scant Europe demand
Spot demand from Europe, which consumes the vast majority of South Africa’s coal, is expected to remain scant at least until the end of the European summer.
If Indian buyers stay out of the market in the meantime, South African prices are likely to fall sharply, traders and utilities in Europe said.
Indian steel production is not as vertically-integrated as it is in other parts of the world.
Sponge iron producers range from extremely small independents to large corporations like Jindal. The quality of their product and the iron ore and coal they use to produce it, vary widely.
Sponge iron is created by reducing iron ore to metallic iron using coal as a reductant. Sponge iron is sold to steel producers for further processing and is often used as an alternative to scrap steel.
To cope with the squeeze, sponge iron plants which can are using more low-quality indigenous coal in blends with less imported material.
Some sponge plants can only use imported South African coal because their plants need a reductant with specific characteristics.
Plants far from coal mining areas, such as those in Goa, will have to rely on imports and may eventually be forced to pay prevailing international prices or close their plants, but the majority have some flexibility, traders said. – Reuters 2007