Executive Summary - Incept Holdings Limited · Executive Summary India Steel Study Astra Mining Ltd 31.01.11 . SALVA RESOURCES ... local coking coal is poor with a high ash content

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Executive Summary

India Steel Study

Astra Mining Ltd

31.01.11

SALVA RESOURCES

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Table of Contents

1.0 INDIAN STEEL INDUSTRY: GROWING FROM STRENGTH TO STRENGTH ....................... 3

1.1 OVERVIEW ........................................................................................................................................................... 3

2.0 INDIA: STEEL DEMAND & PRODUCTION.................................................................................... 3

3.0 INDIA: RAW MATERIAL AVAILABILITY ..................................................................................... 4

3.1 COKING COAL ...................................................................................................................................................... 4

3.2 IRON ORE ............................................................................................................................................................. 4

4.0 CHINESE STEEL INDUSTRY: CONSOLIDATION AFTER HIGH GROWTH ........................... 5

4.1 OVERVIEW ........................................................................................................................................................... 5

5.0 CHINA: STEEL DEMAND AND PRODUCTION ............................................................................. 5

6.0 CHINA: RAW MATERIAL AVAILABILITY .................................................................................... 6

6.1 COKING COAL ...................................................................................................................................................... 6

6.2 IRON ORE ............................................................................................................................................................. 6

7.0 CHALLENGES FACED BY THE STEEL INDUSTRY IN CHINA AND INDIA ............................ 6

7.1 INFRASTRUCTURE .............................................................................................................................................. 6

7.2 REGULATION ....................................................................................................................................................... 7

8.0 COKING COAL SUPPLIES FROM AUSTRALIA AND OTHER NATIONS ................................ 7

INTRODUCING SALVA RESOURCES - COMPANY BACKGROUND ..................................................... 9

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1.0 Indian steel industry: Growing from strength to strength

1.1 Overview

India’s steel industry predates independence. From the initial 1 million tonne (Mt) steel

capacity at the time of independence, India has experienced significant growth becoming

the third largest steel producer in the world (62.8Mt in 2009) and world’s largest sponge iron

producer. Its production capacity is distributed between government steel making

companies like Steel Authority of India (SAIL) and Rashtriya Ispat Nigam Ltd (RINL) and

large private players such as Tata Steel Ltd, Essar Steel Ltd and JSW Steel Ltd.

The Indian steel industry is at a nascent stage of growth and is expected to further develop

as steel demand and the economy grows. The Indian steel industry uses a mix of

technologies to produce hot metal, including Blast Furnace, Electric Furnace, Open Hearth

Furnace and Corex. This mix of technologies ensures that India is able to use iron ore, scrap

iron and thermal coal in its steel making efficiently and manages raw material price volatility

2.0 India: Steel demand & production

The Indian steel industry is primarily driven by domestic demand, a demand the steel sector has

struggled to meet. As a result, India has become a net importer of steel. India’s apparent finished

steel consumption was 55Mt compared to a crude steel production of 62.8Mt in 2009. India’s

production levels are expected to increase with increased spending on infrastructure, an affluent

middle class and a growing automobile industry. India’s steel demand is mainly derived from the

construction industry (63%) and metal products and machinery. In 2009, India’s per capita steel

consumption was 48 kg while per capita steel production of crude steel was 52 kg.

In response to increased demand, the major steel producers including Tata Steel, SAIL, JSW, RINL

all are investing to increase their production capacities to meet user demand. Given that India is still

at a very nascent stage of the steel demand life cycle, steel consumption and hence production is

expected to increase over the next few years. Installed steel production capacity is expected to

increase accordingly and it is expected to reach 138 Mt by 2015. Steel demand during this period is

expected to reach almost 107 Mt by 2015.

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3.0 India: raw material availability

3.1 Coking Coal

India has 276 billion tonnes (Bt) of coal reserves, of which 12% is coking coal. The quality of

local coking coal is poor with a high ash content necessitating beneficiation. To ensure an

ash content of less than 10%, local washed coal needs to be blended with imported high

quality coking. Absence of good quality domestic coking coal has forced Indian steel

makers to import coking coal (31Mt -2009) primarily from Australia. A few steel producers

like Tata Steel, JSW Steel etc have ventured abroad to procure coking coal mines. These

mines have been acquired in countries like Australia, Mozambique and the United States.

Coking coal has been in high demand but overall production has been constrained even in

countries like Australia forcing companies to look at alternative sources like Mozambique

and the United States. Forecast high demand from Asian nations has prompted the

development of new coal fields in Africa. India is heavily dependent upon coking coal

imports to ensure steel production continues its upward trajectory.

3.2 Iron Ore

As per The United Nations Framework Classification (UNFC) reporting code on 01-04-2005,

India has a huge resource base of almost 25.2 billion tonnes of iron ore comprising of

hematite (14.6Bt) and magnetite (10.6Bt). Indian iron ore reserves are mainly located in the

states of Orissa, Jharkhand, Andhra Pradesh, Chhattisgarh, Karnataka, Goa and Tamil

Nadu. Indian iron ore is good quality with most of the mined ore able to be fed directly to

blast furnaces with minimum processing. The fines generated from blast furnaces are

exported to China. However, an increasing number of pelletisation plants have been

developed to process fines to pellets of blast furnace feed grade quality. Self sufficiency of

iron ore is an important part of India’s steel growth. India’s iron ore demand was 104Mt in

2009 and is expected to rise as new plants are commissioned. High grade iron ore is slowly

being consumed and hence new exploration for local iron ore is needed, particularly in

reserve rich states like Jharkhand, Orissa and Chhattisgarh.

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4.0 Chinese steel industry: Consolidation after high growth

4.1 Overview

China’s steel industry is not only the largest in the world; it is also the fastest growing with

18% annualised growth over the past decade. China’s production capacity is more than the

combined top nine steel producing countries in the world. It is also the world largest market

for steel and the largest importer of iron ore in the world.

Today, China contributes 46% of the world steel production and 48% of the world steel

consumption. It has transformed itself from being a net importer to a net exporter over the

past decade.

The Chinese government has moved to try and control this exponential growth and is now

actively supporting consolidation in the steel industry. It is in a position to do so as the steel

industry in China is highly fragmented and largely state owned.

5.0 China: Steel demand and production

To meet the demands of a growing economy, China has developed an enviable steel industry that

has seen demand grow at 18% Compound Annual Growth Rate (CAGR) over the past decade. In

2009, the Chinese steel industry produced a record 567.8Mt of steel with a demand of 542Mt. That

same year saw per capita consumption of 405 Kg compared to crude steel production of 425 kg. The

demand is mainly driven by the construction sector (63%) with machinery and metal products

contributing 18% and 7 % respectively.

The Chinese steel industry is primarily based on blast furnace technology and it dominates the

production capacity with 92% of steel being produced by Oxygen Blown Converters, with the

remaining 8% produced by Electric Furnaces. The industry comprises of large producers like

Baosteel, Hebei, Wuhan and many smaller producers.

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6.0 China: raw material availability

6.1 Coking Coal

Coke produced from coking coal is an integral raw material in steel making. China possesses

large reserves of coking coal and is able to produce enough coke to meet its domestic

requirements. However, its coking coal is of low metallurgical quality and it needs to import

high quality coking coal, mainly from Australia. The availability of good quality coking coal

will affect China’s steel production and imports of coking coal are expected to rise over the

next few years. China imported 34Mt in 2009, a number that is expected to rise in the near

future.

6.2 Iron Ore

China is heavily dependent upon imported iron ore due to the low quality of local iron ore.

There are several iron ore mines in China, but local supply has not been able to meet

demand. As a result China has been dependent on imported iron ore (628Mt -2009), mainly

from Australia, Brazil and India. Like India, high grade imported ore is blended with the low

quality domestic ore to ensure that it is of blast furnace feed grade. The Chinese steel

industry is predominantly based on blast furnace technology and as a result is affected by

the volatility of the iron ore prices. Availability and pricing of iron ore is going to be a key to

the long term growth of the Chinese steel industry.

7.0 Challenges faced by the steel industry in China and India

7.1 Infrastructure

Major steel plants in India are generally located near the iron ore mines ensuring raw

material availability does not affect production. They also tend to have coke batteries in

their plants to ensure availability of coke. However as coking coal is mainly imported, there

are infrastructural bottlenecks in coking coal handling. This is mainly in the ports and

specifically the coal evacuation infrastructure. New coal handling ports are being developed

on the east coast of India which is expected to substantially reduce infrastructural issues.

New investments in rail and road network are expected to further enhance the logistics.

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China imports both iron ore and coking coal. It has excellent infrastructure in place to

ensure that coal transport is not affected. It will however need to invest in new road and rail

networks to evacuate coking coal from the newly developed mines in Mongolia to steel

plants located on the coast.

7.2 Regulation

Both the Indian and Chinese steel industries face heavy regulations from their respective

governments. The Indian steel industry is not government controlled but it is dependent upon

statutory requirements like forest clearances for mines and environmental clearances for plant

operations. Because of bureaucratic hurdles, new projects can take a long time to obtain approval .

However, the situation is improving and we are seeing increased new plant development and the

expansion of existing plants. India has recently imposed a carbon tax on imported or domestic coal

to ensure funding for green technology. However, the quantum of this tax is not expected to impact

steel demand or production.

China has focused on consolidating its highly fragmented steel industry whilst also ensuring the

adherence of pollution control measures. China has also initiated the closure of old inefficient and

polluting plants. However, they have also stated that a steel carbon tax will be imposed in the near

future, the quantum of the tax though is not expected to impact steel demand or production.

8.0 Coking coal supplies from Australia and other nations

A critical part of blast furnace based steel production is the supply of coking coal. Currently

Australian coking coal producers are the major market share holders with additional supply being

sourced from the United States and Russia. The Australian coking coal industry has been struggling

to expand capacity to meet demand. Regulatory and infrastructural issues have hampered the

industry’s ability to meet the exploding demand for coking coal. Port infrastructure has not kept

pace with the growth of new production capacity at the mines thus causing problems in coal export.

Other countries like US and Russia have stepped into the market to meet the demand. There has

also been a new development in the African continent where new coking coal mines are being

developed in countries like South Africa, Mozambique and these are expected to cater to the

demand. The African mines hold immense promise and this has been amply illustrated by the

recent acquisition of Riversdale Mining Ltd in Mozambique by Rio Tinto.

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Disclaimer:

Astra Mining Ltd (Customer) hereby acknowledges and agrees that Salva makes no representation or warranty, express or implied, as to the truth, accuracy, relevance, completeness or usefulness of the goods or services, whether oral or written; communicated to the Customer, and that Salva shall have no liability, in negligence or otherwise as a result of the Customer’s use of or reliance upon the Information.

Salva accepts no responsibility for any interpretation, opinion or conclusion that the Customer may form as a result of examining the goods or services.

The Customer acknowledges that any opinions expressed by Salva are based on the knowledge and approach of the persons forming the opinion at the date that the opinion was formed and may have ceased or may in future cease to be appropriate in light of subsequent knowledge or attitudes.

Subject to any applicable legislation affecting the right of Salva to limit its liability, Salva shall not be liable in any way whatsoever to the Customer or to any other person or entity for any loss or damage howsoever caused which the Customer or any other person may suffer whether or not such loss or damage arises as a result of the goods or services or any defect in those goods or from the failure or omission on the part of Salva (or any of its representatives, agents or employees) to comply with any obligation at law.

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SALVA RESOURCES



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Introducing Salva Resources - Company Background

Salva Resources is a global provider of key technical and commercial services for exploration,

mining and investment companies. These services extend across the entire project development

timeline:

Exploration Management

Geological Modelling

Mine Planning

Site Safety Management

Resources Marketing

Due Diligence and other commercial services.

With offices in Brisbane, Kolkata and Jakarta, Salva Resources has a thorough understanding of

commodities marketing activities. Specializing in coal, our marketing team has dedicated

experience in coking and thermal products, logistics, trade finance, sales and agency contracts,

price and volume negotiations and revenue forecasting.

Salva Market Analytics (SMA) comprises a team of six analysts based in Kolkata, providing up-to-

date data, news, views and analysis of developments in the Indian steel, power, coal and

infrastructure sectors. SMA is led by an experienced industry analyst from Australia, and monitors

all projects and developments in these industries and forecasts the likely implications.

Current Projects

Salva Market Analytics is currently delivering the following projects:

A comprehensive review of Indian port and rail infrastructure for 2010-15 for a global coal

producer;

An in-depth study of Indian thermal coal demand, domestic production and imports – along

with identification of infrastructure constraints and high/low scenarios - for 2010-20 for a

major European utility;

A global analysis of seaborne thermal coal trade over the next 20 years, based on individual

country forecasts, for one of the largest coal ports in the world;

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Our Recent Achievements

Salva Resources’ Market Analytics team successfully completed the following projects in Q3 2010:

Technical assessment of coal seam quality for Australian producer to upgrade product from

thermal to semi-soft coking coal via selective mining;

India market study, customer segmentation and market development services for a major

global mining company (for new African coal assets);

Forecast of Indian thermal, coking and PCI import demand on an annual basis out to 2020

for a major North American coal producer;

Development of an Indian thermal coal import demand model for a large European utility;

Detailed review of Indian steel making technologies and transition taking place for an

international client;

Detailed review of Indian coal import infrastructure for a major European trading house;

India thermal coal import demand forecast -2015, grade wise and country wise for a major

Japanese trading house;

For more information on Salva Resources’ technical and commercial capabilities, contact Jitendra

RoyChoudhury (Manager - Analytics) on +91 (33) 4004 4144 or [email protected].

Documents

Executive Summary - Incept Holdings Limited · Executive Summary India Steel Study Astra Mining Ltd 31.01.11 . SALVA RESOURCES ... local coking coal is poor with a high ash content