Tata says tight coking coal to support steel

Good quality coking coal supply will remain scarce in the next few years and will support steel prices, Tata Steel group director of procurement, Kees Gerretse told Reuters on Wednesday.

"If you are looking to steel consumption and production and coking coal assets, coking coal in the long term will go up; to what level it would be hard to predict," Gerretse said on the sidelines of a Metal Bulletin steel scrap conference.

Prices of hard coking coal -- a key steelmaking ingredient -- are about USD 300 a tonne from about USD 200 a tonne a year ago, because of logistical bottlenecks and tighter supply due to flooding which hit top producer Australia earlier this year.

If prices rise further however, some buyers will start to use substitutes such as semi-soft coal or other qualities of coal.

"(Lower coal grades) are good enough but they affect the production process," Gerretse said.

"In today's market, where you don't have the full utilisation of assets you can use lower coking coals."

Tata Steel agreed to sell its 26% stake in Australia's Riversdale to Rio Tinto  for USD 1.1 billion earlier this month, giving the Anglo-Australian giant full control of the coal miner.

The Indian branch of Tata Steel imports some coking coal but it is already self-sufficient in iron ore. Tata Europe has 10-12% self-sufficiency in raw materials.

"Iron ore is not scarce; there is a lot of it in Africa," Gerretse said.

"It is just about how quickly we can develop the assets linked to the growth of production in China. In the short term there is some tightness but in the next five years the situation will be better," he added.

"It is all about people daring to invest in African countries," he added, underlining that political risk and logistics are the major difficulties for miners in the continent.

Tata Steel buys iron ore on a quarterly pricing basis from the main miners and smaller volumes on annual basis from smaller companies such as Swedish state-owned producer LKAB.

It buys coking coal on a mix of annual and quarterly pricing basis depending on the supplier.

Tata Steel is also investigating the use of iron ore derivatives but will not use these financial instruments unless the market attracts more liquidity, group director of procurement Gerretse added.

Iron ore swaps trade got a boost when miners Vale, BHP Billiton  and Rio Tinto dumped a decades-old annual benchmark system for the steel feedstock and moved to quarterly pricing in 2010.

Yet trading volumes remain too low for Tata Steel to enter this market, Gerretse said on the sidelines of the Metal Bulletin steel scrap conference in Istanbul. "We are investigating it (iron ore derivatives) as a trend but we don't do actual hedging at the moment," Gerretse said.

"Iron ore (swaps) is not a liquid market. It is only (a few) million tonnes on trades and our consumption is already 27 million tonne per year."

If liquidity improved however, Tata Steel could start using iron ore swaps, a financial instrument which allow producers, consumers and financial market participants to hedge or bet on prices in the future.

"Depending on our selling strategy, if we have long-term (sale) contracts we can always link our hedging position to the customers," Gerretse said. "We do that in zinc. We do that in aluminium."

As iron ore pricing becomes more flexible, steelmakers are pushing for shorter steel pricing mechanisms.

Steel buyers such as carmakers prefer to buy steel on longer contracts, to control their costs. But European steelmakers are now trying to agree with customers quarterly price revisions in order to pass on raw materials cost volatility.

Some automakers such as Renault Nissan have been urging steelmakers to use iron ore and steel derivatives to manage their input costs so that they can offer customers the long-term price stability they need.

The largest European steelmakers however, are still not favourable to using steel derivatives as the futures market eats into their control over pricing.

"We would like to stick more to invest in value-added products and LME commoditise your products and in Europe we don't want that," Gerretse said.