I ndIan S teel /C okIng C oal o utlook 2011-12

Strike while the Irons Hot

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SALVA RESOURCES - COMMERCIAL IN CONFIDENCE

This Document contains confidential and commercially sensitive business information of Salva Resources Pty Ltd. This Document may not be reproduced in part or in whole without permission of Salva Resources Pty Ltd. This Document may not be shown to any Third Party in part or in whole without permission of Salva Resources Pty Ltd.

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Table Of Contents
1.0 Executive Summary 2.0 Overview - Coking Coal Demand
2.1 2.2 2.2.1 2.2.2 2.2.3 2.3 2.4 2.5 2.5.1 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.1.1 4.1.2 4.1.3 4.2 4.3 4.4 4.5 4.5.1 4.6 4.6.1 4.6.2 4.6.3 4.6.4 5.1 5.1.1 5.1.2 5.1.3 5.2 5.3 5.3.1 5.3.2 5.3.3 5.3.4 Steel Production Industry Structure Integrated Steel Producers Mini Blast Furnaces Merchant Coke Producers Steel Production Processes Products Steel Demand Steel Demand Drivers

4 5
5 6 7 8 10 10 11 11 13

4.0 Review of FY10-11

Steel Production New Capacity Major Producers Production by Technology Steel Consumption Steel Trade Price Trends Corporate Activity Regulatory Changes Coking Coal Supply Domestic Coking Coal Production Coking Coal Imports Major Coking Coal Importers Coking Coal Price Trends

Domestic Coking Coal Coking Coal Reserves Domestic Coking Coal Production Coking Coal Quality Coking Coal Profiles of Indian Steel and Coke producers Coking Coal Imports

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3.0 Overview - Coking Coal Supply

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15 15 16 19 20 23

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25 26 27 27 28 29 29 30 31 32 32 33 34 35

5.0 Outlook for FY11-12

Steel Production New Capacity Major Producers Production by Technology Steel Consumption Coking Coal Supply Domestic Coking Coal Production Coking Coal Imports Major Coking Coal Importers Metallurgical Coke

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36 37 38 39 39 40 41 41 42 43

Glossary Appendix

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2.2.3

Merchant Coke Producers

To support the integrated steel producers (ISP) and mini blast furnace (MBF) sectors, a relatively large merchant coke industry has developed in India. Indian merchant coke producers are largely situated in the eastern states of West Bengal and Orissa, and the western state of Gujarat. Logistics and proximity to large consumer markets are the primary factors contributing to this skewed concentration. A map of the major coke producers in India is included in Appendix 1. In the east, there are a large number of small cokeries with capacities ranging between 6,000 tpa to 48,000 tpa. Their cumulative capacity is estimated at around 5 Mtpa. These units are primarily situated near the Dhanbad coal belt. Furthermore, there are government-owned coke plants on the east coast.

the sector is highly fragmented and generally purchases raw materials on the spot market, operations are erratic and disorganised and highly exposed to market conditions. As such, authentic data concerning annual production and coking coal requirements is difficult to obtain.

2.3

Steel Production Processes

iron. Iron produced via BF technology contains high amounts of carbon and other impurities and is called pig iron. Due to its high carbon content, pig iron has limited end use application. To make steel products out of pig iron, it through slag separation. The primary inputs to BF are iron ore and coking coal/coke. Generally, integrated mills use BF/BOF routes to produce finished steel. Producers that use this technology include SAIL, RINL, TSL and JSW Steel.

Electric Arc Furnace: The basic purpose of an electric arc furnace (EAF) is re-melting sponge iron and melting scrap steel (its main inputs), to produce finished steel. It uses significant amounts of electricity in the melting process, as much as 400-500 kWh/tonne (please refer to Salvas India Power/Thermal Coal Outlook for more information on Indian power consumption). Ispat, Essar and the Monnet Ispat group are examples of producers who use this technology. COREX Process: COREX is an alternate process of steel making. Though only a handful of steel producers use this process, it is possible to use thermal coal directly in smelting and also use lump ore and pellets as inputs. These two advantages allow steel producers to eliminate coke plants and sinter plants. At present only JSW Steel uses COREX technology in India to produce finished steel. Induction Furnace: Like EAF, induction furnaces (IF) use electricity as their primary fuel. IF is the most environmentally friendly and efficient way of producing steel. However, its lack of refining capacity requires clean products (i.e. better quality scrap) as inputs. Large numbers of small steel companies use this technology.

Indian Steel / Coking Coal Outlook 2011 - 12 | Strike while the Irons Hot

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is further processed in a basic oxygen furnace (BOF) where its carbon content and other impurities are removed

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Blast Furnace and Basic Oxygen Furnace: Blast furnace (BF) technology converts iron ore into a liquid form of

India steel producers employ a wide range of technologies including the below:

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In summary, there are about 190 merchant coke oven units in India with an installed capacity of about 9 Mtpa. Since

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The technology structure of the Indian steel sector has been slowly moving towards electric arc furnace (EAF) over basic oxygen furnace (BOF). Even as late as FY04-05, steel making via the BOF route accounted for a 52% share of Indias total crude steel production, while other technologies such as EAF and IAF accounted for 18% and 30%, respectively. But the scenario has changed and by FY09-10 and the share of BOF in crude steel production dropped to 47%, while steel production through the EAF route increased to 26% (see below).

Crude-7: Crude steel produc3on by Fig Steel Production by Process Process (% Share, FY 05) (% Share, FY04-05)

Crude Steel Production by Process Fig-8: Crude steel produc3on by Process (% Share, FY 09) (% Share, FY09-10)

30 52 18

BOF EAF IF

31 45

BOF EAF IF

Source: JPC, Salva

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Longs Flats
20%

2.4

Products

Indian steel products are almost equally distributed among flats and longs (see chart below). Flat products such as plates and hot rolled coil are mainly consumed by the automotive, construction, oil and gas, capital goods and consumer durables industries. On the other hand, long products including rebar and wire rods are primarily consumed by the construction sector. During FY10-11, bars and rods constituted nearly 37% of the total steel production, whereas hot rolled coils (HRC) comprised 20% of the total finished steel production (see below).

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Composition of f Flat & ong P Products in Fig - 5: Composi-on oFlat & LLongroducts in India India(FY10) (FY10-11)

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Source: JPC, Salva
0% 5% 7% Plates 10% 37% HRC CRC GP/GC Tinplate 9% 7% 2% Pipes

Fig - 6 of Indian Finished Steel Products Profile: Prole of Indian Finished Steel Produc(FY10-11) 0% (FY10-11) 3%

Bars & Rods Structurals Railway Materials

Flats 49.7%

Longs 50.3%

Electrical Sheets

Alloy Steel

Source: JPC

Source: JPC

2.5

Steel Demand

While the rest of the world struggles to attain pre-global financial crisis steel demand levels, India surpassed that level in 2009. Steel demand in India, as measured by apparent steel consumption (estimated as crude steel production plus imports minus exports), has grown by 12% CAGR in India over FY03-04 to FY10-11 to attain 72 Mt (see below).

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Apparent Steel Consump0on (Mt) (Mt) Apparent Steel Consumption

80 70 60 50 40 30 20 10 0 FY03-04 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11*
Source: JPC *Estimate as full FY actual data not yet available

69 51 56 60

72

41 31

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India is still in the very early stages of its economic development, so steel consumption per capita is extremely low China, which is considerably higher at 405kg per capita (see below).

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450 400 350 300 250 200 150 100 50 0

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334 272 193 176 128 93 48
Iran USA Russia Vietnam Brazil India
Source: WSA

405

Japan

China Germany

In India, the construction sector consumes the greatest amount of steel, consuming 63% of the total production in FY09-10. Metal products consumed 12% of and machinery accounted for 10% of Indias FY09-10 steel production (see below).

Indian Steel / Coking Coal Outlook 2011 - 12 | Strike while the Irons Hot

Apparent Steel Use per er Capita (2009, Kg) Fig-10: Apparent Steel Use pCapita (2009, Kg)

at around 48kg compared to the world average of 179kg per capita, and significantly below its Asian peers including

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4.0 Review of FY10-11

The Indian steelmaking market for FY10-11 was characterized by a slower growth rate due to a lack of added capacity, steel imports, iron ore movement restrictions, and major merger and acquisition activity by a number of the biggest players in the worlds steelmaking market. A summary of major market drivers and indicators is included below. FY09-10
Effective Steel Capacity (Mt) Crude Steel Production (Mt) Apparent Consumption (Mt) Coking Coal Demand (Mt) Washed Coking Coal Production (Mt) Coking Coal Imports (Mt) Coke Imports (Mt)

FY10-11* In Full Report In Full Report

Change In Full Report In Full Report In Full Report In Full Report In Full Report In Full Report In Full Report

73 65 69 38 6.9 31 2.8

Source: Salva Note: *Estimate as full FY actual data not yet available

By the end of the FY10-11, Indian crude steel production is likely to grow by just by x.x%. The main reason for this restrained growth was the relatively minor steel capacity that was added during the financial year. With the exception of Bhushan Steels plant commissioned in Orissa (2.3 Mtpa) and Essar Steels two plants commissioned Galva Metallics (0.5 Mtpa). Another major constraint on the growth of steel production was the blanket ban on the movement of iron ore out of the state of Karnataka. This ban severely hampered steel production in nearby states Goa, Maharashtra and Tamil Nadu, which are dependent on iron ore supply from Karnataka. in Hazira (3.4 Mtpa), the only other added capacity of note was a plant commissioned in Maharashtra by Uttam

4.1 Steel Production

FY10-11 proved to be a consolidating year for the Indian steel industry, with production estimated to grow by just 2.8Mt, the lowest growth rate in the last five years, while many other countries witnessed double digit growth. The phenomenal growth in steel production outside India was mainly due to the low base effect in 2009, resulting from 2008s global financial crisis (GFC), which was not applicable to India as it registered an impressive 8.7% growth during 2009 (see below). Indias position as the third largest steel producing country in 2009 slipped to fifth in 2010 as other major producers (USA and Russia) bounced back from a terrible 2009.

Indian Steel / Coking Coal Outlook 2011 - 12 | Strike while the Irons Hot

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In Full Report In Full Report In Full Report In Full Report

In Full Report

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Crude Steel Productionn India (Mt) Crude Steel Produc-on i in India (Mt)
80 70 60 50 40 30 20 10 0 FY03-04 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11* 39 43 46 51 54 58 65 68

Source: Ministry of Coal, Salva Note: *Estimate as full FY actual data not yet available

There are a number of key reasons for the relatively lacklustre growth in FY10-11. As referred to earlier, the primary responsible for the restrained steel production growth include:

Periodic disruption in iron ore supply from Orissa due to its effort to clamp down illegal mining in the state. Independent States (CIS) countries.

A blanket ban on movement of iron ore out of the state of Karnataka severely hampered steel production in the nearby states Goa, Maharashtra and Tamil Nadu, all dependent on iron from Karnataka. steel mills to ramp up production. A prolonged monsoon season diminished steel demand and cut steel prices, becoming disincentives for

in production in FY10-11 mainly on account of the upgrading of existing plants and increased productivity. 4.1.1 New Capacity

Only three steel companies added to their capacity in FY10-11, combining for a total of 6.2 Mtpa of added nameplate capacity. Much of this new capacity was commissioned late in the financial year, resulting in less than 3 Mtpa of effective capacity. The new capacity is tabled below.

Indian Steel / Coking Coal Outlook 2011 - 12 | Strike while the Irons Hot

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In spite of the relative small total of new added capacity, the Indian steelmaking industry registered a 4.3% growth

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Higher domestic steel prices gave rise to cheap steel imports from China and former Commonwealth of

reason is a modest total, in Indian terms, of added effective capacity during the financial year. Other factors

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Company name
Bhushan Steel Essar Steel Essar Steel Uttam Galva Mettalics

Location Meramandali, Orissa Hazira, Gujarat Hazira, Gujarat Wardha, Maharashtra

Production Route BF - BOF BF - BOF DRI-EAF BF-BOF

Hot Metal Capacity (Mtpa) 2.3 1.7 1.7 0.5 6.2

Date of Commissioning May 10 Dec 10 Dec10 May 10

TOTAL 4.1.2 Major Producers

amongst Indias top five steel producers owing to new capacity coming on-stream in the latter half of FY10-11.

Top 5 Steel Producers (Mt) Top 5Steel Producers (Mt)

16 14 12 10 8 6 4 2 0 6.6 6.8 13.7 13.5

e
6.0 5.9 3.5 4.1 3.2 3.2 JSW Steel Essar Steel RINL

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FY09-10 FY10-11 * Tata Steel

SAIL

4.1.3

Production by Technology

Blast furnace and basic oxygen furnace (BOF) steel production increased its overall share of steel production by process to 49%, following a period since FY04-05 where the Indian steel sector shifted toward electric arc furnace (EAF).

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Source: Salva Note: *Estimate as full FY actual data not yet available

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Indias major steel producers are charted below. Essar Steel was the only major to significantly increase production

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