KAMDHENU ISPAT LIMITED - Securities and Exchange Board of India

to compete with the likes of China, the only way is cost competitiveness.
On the global front, trade in iron-ore has increased at a pace faster than that of steel production on account of
increasing imports by China. China imported approximately 200MT in 2004 and is expected to import around 240MT
in 2005, accounting for 42% of total sea-borne trade. Indian iron ore accounted for approximately 25% of these
Chinese imports. As a result of the lack of iron ore availability, a large spot market has developed with prices well
above the benchmark (the long term price) in the most liquid Chinese market. Further, freight rates have significantly
widened the pricing differential between Brazil/Australia to North Asia – making locally sourced ore cheaper on a
delivered basis. Indian manufacturers of iron-ore have taken full benefit of the situation to the detriment of their
contract benchmark customers as they exhibited a preference to export rather than cater to the domestic market.
The steel units with captive mines are expected to benefit from integration of the entire steel making production
process. They will also be able to acquire raw materials at competitive costs compared with other global manufacturers.
This will insulate them from any volatility that ore prices may witness, globally. However, pricing may move in tandem
with global demand-supply dynamics – with an expectation that additional global mining capacities would ease
pressures steel prices in the medium term. In fact, the world’s two biggest manufacturers of steel namely Mittal Steel
and Arcelor SA have cut down production in 2005 to buoy prices as manufacturers run down inventories. In conclusion,
owning mines and captive iron ore supply will benefit steel manufacturers in a big way.
b) Coal
India has large reserves of coal, a substantial proportion of which is high-ash coal that is suitable for thermal power
plants with limited usage in the steel industry. It is essential to use non-coking coals with high reactivity characteristics
and high ash fusion temperatures for rotary kiln coal based iron manufacturing processes. In the sponge iron
manufacturing process, coal acts as feedstock than as fuel to provide heat to the process. Moreover, only a few
select collieries have high-grade coal available with them. This limited coal is wasted as mere heating fuels in
cement kilns and power plants rather than being reserved for sponge iron manufacturing.
Coal forms an important raw material to manufacture sponge iron . Integrated manufacturers of steel through blast
furnace route are dependent largely on imported coal (hard coking coal or coke). Production and prices of domestic
coal are controlled by Coal India Limited, which along with its subsidiaries controls 95% of India’s production. Despite
the 17% hike announced in CY04, prices are significantly lower than international prices giving a cost advantage to
Indian sponge iron players. On the flip side, as allocation of coal is done on an annual basis, a linkage with Coal
India needs to be in place to source domestic coal. Since requirement for hard coking coal and coke are met through
imports, the largest impact of its price volatility is felt by integrated steel manufacturers who use the blast furnace
route.
The impact on manufacturers has been marginalized due to long-term contracts for the supply of coking coal and
increase in sales realizations, which too have more than offset the increase in raw material prices. The increasing
tendency of Indian companies to acquire majority stake in Australian and South African mines is likely to provide
assured supplies with some pricing benefits. The global outlook for hard coking coal is similar to that of iron-ore –
with an expectation of strong global demand from the coke-oven batteries being set up in India and China.
c) Power
Power is another important input in the steel industry. Most of the steel units, earlier, were dependent on the state for
the supply of power that was available at prohibitive costs. Moreover, generation was low with large-scale frequency
fluctuations. The plant load factor was also not maintained high levels throughout India. However, bigger steel units
have set up captive power plants as government’s power policy was altered. These plants use flue gases and coal
for generating power. In this manner, power generated is 20-25% cheaper to commercially available power. This has
reduced substantially the power costs for steel units. Since this power does not use conventional fuel for generation,
it can avail of carbon credits as per the Kyoto protocol.
II. Sponge Iron
(i) Background
Sponge iron, also known as direct reduced iron (DRI), is a high quality metallic product manufactured by reducing
iron ore lumps/pellets. Two major raw materials required to produce sponge iron are iron ore and coal.
The sponge iron industry comprises two kinds of producers:
· Gas based
· Coal based
As the distinction is drawn on the basis of fuel used, gas based sponge iron is purer compared to coal based sponge
iron and therefore gets a premium.
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