Why Russia's new trade route to India is pertinent to the domestic steel industry: MC explains

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In June 2024, Russia announced a new shipping route to export coal to India via Iran, leveraging the International North-South Transport Corridor (INSTC). This announcement was made during the 27th Saint Petersburg International Economic Forum. The INSTC aims to enhance connectivity and reduce transportation costs and times, potentially cutting transit time from 45 days to just 15 days.

This development is expected to significantly benefit India's steel companies by ensuring a steady and more cost-effective supply of coal, a critical raw material.

"Amidst geopolitical shifts and evolving trade dynamics, Russia has strategically redirected its coal exports towards Asia, particularly India and China, due to sanctions from the West. Notably, Asian demand for Russian PCI (pulverised coal injection) and coking coals surged, driven by competitive pricing compared to alternatives from Australia and North America," BigMint analyst Nishtha Mookerji told Moneycontrol in a statement.

MC explains why the the new trade route is important for domestic steel players such as Steel Authority of India Limited, Tata Steel and JSW Steel.

What is the new trade route and how does it work?  

The INSTC is a multi-modal network aimed at enhancing connectivity and trade between Russia, Iran and India. This corridor integrates rail, road and maritime routes, spanning approximately 7,200 km. It involves moving coal by rail from Russia's hinterland, then from Russia's ports to Iran's ports on the Caspian Sea.  From there, the coal is transported overland through Iran to its southern ports on the Persian Gulf. Finally, the coal is shipped by sea to Indian ports. Reportedly, Russia last week dispatched two trainloads of coal with final destination India.

MC Explains

Why is this trade route significant for Indian steel companies?

This multi-modal transport system is expected to significantly cut down transit time compared to traditional routes, which often involve longer sea journeys through the Suez Canal. Lower transportation costs mean that Indian steel companies can procure coal at more competitive prices.  Domestic players  import around 90 percent of their coking coal requirement and thus any fluctuations in the cost of the key raw material affects steel prices.

Coking coal prices saw a significant increase in 2022 and peaked at approximately $670 per tonne. This rise in prices put substantial pressure on the margins of Indian steel producers, leading to higher steel prices domestically. In May 2022, the government imposed export duties on steel in primarily to address rising domestic prices and ensure the availability of the commodity locally.

What are the advantages for companies like Tata Steel and JSW Steel? 

By leveraging Russia's new trade route via Iran, Indian steel players can diversify their coal supply sources, reducing their reliance on Western suppliers such as Australia and the US.  This diversification will help them to mitigate price risks, ensure a stable supply of high-quality coal, reduce logistics costs and enhance their negotiating power with suppliers.

What is the current status of India's coking coal imports from Russia? 

According to data from Bigmint, Russia's coal exports to India decreased by 22.4 percent in the three months to May, compared to last year, totalling 6.76 million tonnes. In contrast, US coal exports to India rose 14.4 percent during the same period, reaching 6.68 million tonnes.

"India's recent slight decline in coal imports from Russia, despite the competitive pricing, is attributed to higher freight rates and competition from established suppliers," Mookerji added.