Indian Steel Association calls for cheaper coking coal

In a recent statement, the Indian Steel Association (ISA), a lobbying body for steel companies, sought intervention of the government to check the prices of coking coal. Now, coking coal is one of the most important inputs in steel manufacture.

The big challenge is that the price of coking coal is up 3-fold in the last 1 year from $130/tonne to $450/tonne. As of now, India meets 85% of its coking coal via imports from Australia. But, let us quickly look at how coking coal gets into the manufacture of steel.

How coking coal gets into steel manufacture?

The largest single use of coking coal in steel is as a fuel for blast furnace. Currently, blast furnace technology accounts for 70% of global steel production while the balance 30% is accounted for by the electric arc furnace method.  

Nearly 70% of steel companies therefore rely on coking coal to fire their blast furnaces. For instance, just to take a thumb rule measure, 1 tonne (1,000 KG) of steel manufacture requires about 600 KG of coking coal. 

Coke is made by baking coal without oxygen to remove the volatile hydrocarbons. Coke is mechanically strong, porous, and chemically reactive, which are essential for stable blast furnace operation. The problem with making coke is that it is very hazardous environmentally. That is the reason very few countries are able to produce coking coal at such large scale, and the dependency is heavy on Australia for coking coal.

How coking coal prices are impacting steel companies?

When the requirement of coking coal is 600 KG for every tonne of steel, the cost impact is obviously going to be significant. The ISA has sought the intervention of the government to check the price of coking coal.
 

It had rallied from $130/tonne to $670/tonne by March 2022 but has now tapered to around $450/tonne. Still the 3-fold spike in coking coal prices is too much for the steel industry to handle. Auto slowdown is already pinching them hard. 

Let us look at how this translates into the cost structure of steel at the current juncture. At the current price of $450/tonne, the cost of coking coal in one tonne of steel alone has gone up nearly Rs.30,000 considering that the ratio is about 600 KG per tonne of steel.

Then there are other inputs in the manufacture of steel like iron ore, ferro alloys as well as other variable costs like fuel, logistics etc. All these add up to making Indian steel uncompetitive. 

There is another practical problem that steel industry has to contend with. For example, crude oil has doubled in the last one year. Now crude has strong externalities, in the sense that it impacts almost all products and services by impacting the price of petrol and diesel.

That also contributes to enhancing the cost of producing steel. That is why the ISA has been trying to prevail upon the government to check coking coal prices and help the steel sector.

The whole problem with coking coal is that it is predominantly imported. Coking coal and iron ore are the two key raw materials used in steel making. While iron or is largely available domestically, the problem is that India still needs to import 85% of its coking coal needs from countries like Australia and to a lesser extent from Russia.

While the ISA has alleged coking coal cartelization as the major risk factor for steel industry, it is unclear how much the government can really do to check the price of products that are international.

In a sense, steel is ubiquitous. It is the most widely used alloy and its applications range across infrastructure, railways, machinery, food processing, white goods, consumer durables, metro projects, automobile, construction etc.

A rise in the price of steel will impact the entire value and supply chain in these sectors. Also, steel has a strong multiplier effect and is the key to boosting macroeconomic growth. The question, however, still remains as to how the ISA proposes that the government intervene.