Mittal Price Squeeze in $960 Billion Steelmaking Industry By Thomas Biesheuvel - May 31, 2012

Lakshmi Mittal, whose $46 billion takeover in 2006 created ArcelorMittal as the world’s largest steelmaker, is getting pushed around.
The U.K.’s richest person can’t stop his iron-ore suppliers from raising prices and can’t pass on higher costs to customers like Volkswagen AG (VOW), after the Luxembourg-based company’s market share fell to its lowest since 2009. The stock slid to a record in May this year, and its bond yields are close to record highs.
Even after years of consolidation, today’s five biggest steelmakers including ArcelorMittal and South Korea’s Posco control no more than 19 percent of the $960 billion global market, too little to defend their prices. In contrast, BHP Billiton Ltd. (BHP), Vale SA (VALE) and Rio Tinto Group mine about 63 percent of the world’s iron ore exported as the main ingredient in steelmaking, while the five biggest automakers that buy ArcelorMittal’s steel make about 51 percent of the world’s cars.
“They really are between two behemoth industries,” said Tim Cahill, an analyst at J&E Davy Holdings Ltd. in Dublin. “They are just one cog in a chain between large suppliers and customers and they are just the middle man with no pricing power.”
ArcelorMittal reported an operating margin of 5.2 percent last year, compared with 49 percent at Vale, the world’s biggest iron-ore exporter.
Spokesmen for ArcelorMittal, Rio and BHP declined to comment when contacted by Bloomberg News. Vale’s press office in Rio de Janeiro declined to comment.
The global pinch is sharpest in Europe. The Bloomberg Europe 500 Steel Index has dropped 80 percent in four years, the worst performance of the 37 industry groups tracked by Bloomberg.

Sluggish Profit Growth

ArcelorMittal is fighting to increase its market share from 6.2 percent last year as the industry faces a 1.8 percent earnings-growth forecast in the next 12 months. That compares with an average 6.7 percent among Europe’s largest 500 companies tracked by Bloomberg.
Mittal has seen his market share eroded by the financial crisis, slipping from 9.5 percent in 2006, when he created a steelmaker with $88.6 billion in annual sales, according to data compiled by Bloomberg. Germany’s largest steelmaker ThyssenKrupp AG (TKA) said May 15 that earnings were being curbed by “intense competition” in the steel industry.
Global steel capacity use is about 80 percent, according to Macquarie Group Ltd., a level too low to give steelmakers pricing power.

‘Party Hangover’

World steel demand growth is forecast to slow to 3.6 percent this year from 5.6 percent last year and in Europe there may be a 1.2 percent contraction as the sovereign debt crisis saps purchases. Europe “remains a live concern” ArcelorMittal’s Chief Financial Officer, Aditya Mittal, said last month.
“We are still suffering from the party hangover from the 2005 to 2008 years,” said Christian Georges, a London-based analyst at Olivetree Securities Ltd. “It was a once-in-a- lifetime situation where the steel suppliers had the upper hand on desperate buyers.”
The CFO Aditya Mittal, Lakshmi Mittal’s son, said on a conference call last month that the industry has “room to do better” on supply discipline, while ThyssenKrupp said industry price discipline was “weak.”
ArcelorMittal (MT) “gives one the impression that there is a relatively high degree of consolidation,” Georges said. “The truth is that one big guy can’t change the logic of the industry. What does change it is when you have an oligopoly of three or four guys.”

Mittal Versus Chinese

Under Mittal, the 61-year-old chairman and chief executive who began his industrial career in his parents steel company, the company trimmed output about 20 percent from the 116 million tons produced in 2007, while Chinese mills have more than doubled volumes since 2004 to 684 million metric tons last year.
Global steel sales totaled about $960 billion in 2010, according to a report by Research and Markets, a Dublin-based research company.
Rio Tinto (RIO), Vale and BHP posted record operating profit last year, driven by profit from their iron-ore units. The steel producers have struggled to adapt to changes in raw-material pricing introduced two years ago as mining companies ended a decades-old system of annual contract talks in favor of quarterly accords or spot pricing.

‘Upper Hand’

That means steelmakers have lost the ability to negotiate the price of their biggest cost base, eroding margins as too much steelmaking capacity and competition for sales makes it difficult to pass on cost rises to their customers.
“There’s no doubt that having three guys controlling the world’s low-cost iron ore means that they have the upper hand,” said Georges. “They can accelerate or slow down their supplies and they will dictate the price level.”
To be sure, ArcelorMittal has focused on buying and building its own iron-ore and coal mines to reduce dependence on the biggest producers. The company plans to produce 100 million metric tons by 2015, up from 54 million tons last year, as it taps mining assets in countries including Canada, Brazil and Liberia.
“Steel production is essentially a conversion business now, and the days when raw materials made up only 30 percent to 35 percent of costs, compared to 75 percent to 80 percent now, are long gone,” Macquarie Group said in a May 14 report. Given weak demand and overcapacity “the coming months and even years are set to see relatively tepid price action and thin steelmaker margins.”

Price Decline

ArcelorMittal’s average steel selling price at it’s Flat Carbon Europe unit, the company’s biggest business by sales, was $861 a ton in the first quarter, down from $928 a year earlier. The unit reported earnings before interest, tax, depreciation and amortization of $17 a ton in the first three months of 2012, down from $64 a year earlier.
European steelmakers have lost about three-quarters of their value from the industry’s pre-crisis peak in 2008. That compares with a 35 percent decline by the automakers from a 2007 high, and a 48 percent fall for mining companies from a 2008 peak, based on the Bloomberg World Auto Manufacturers and Bloomberg World Mining indexes.
“Unfortunately they are just the price taker in this, with customers who are very consolidated and suppliers who are probably the biggest oligopoly in the world,” said Cahill. “It’s hard to know what is going to change.”
To contact the reporter on this story: Thomas Biesheuvel in London at tbiesheuvel@bloomberg.net
To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Air India Pilot Squabbles Mar Dreamliner Debut: Corporate India

By Karthikeyan Sundaram - May 28, 2012

Air India Ltd. will receive its first Boeing (BA) Co. 787 this week as a pilots’ dispute over who should fly the aircraft triggers cuts in international services and more than 100 dismissals.

Air India is taking delivery of one 787 aircraft and flying it to the country this week, according to a civil aviation ministry official who declined to be identified citing rules. The carrier will start using the jet with services to Melbourne, Aviation Minister Ajit Singh said May 25.

“The induction of the 787 should have been a major and positive milestone,” said Binit Somaia, a Sydney-based director of CAPA Centre for Aviation, an industry consultant. “Instead, there is a possibility that the new plane may be temporarily grounded due to human-resources issues.”

Travelers have suffered three weeks of disruptions because of protests rooted in a merger five years ago that has left the state-owned airline with duplicate resources and warring unions. It has also caused losses, with the government this year agreeing to 300 billion rupees ($5.4 billion) of bailouts through 2020.

The fuel-efficient plane is about three years late because of production delays, which have prompted Air India to seek about $1 billion in compensation from Chicago-based Boeing. Wilson Chow, a spokesman at the planemaker, declined to comment on the deliveries.

Dinesh Keskar, senior vice president of sales for Boeing Commercial Airplanes in India and Asia Pacific, didn’t immediately reply to two calls to his mobile phone and an e-mail seeking comments. G. Prasada Rao, an Air India spokesman, also didn’t respond to two calls to his mobile phone.

Indian Airlines

The introduction of the 787 has sparked protests as Air India has given training on the new aircraft to pilots who previously worked at Indian Airlines, the state-owned domestic operator that combined with Air India in 2007.

Pilots who worked at Air India before the merger say they should be the only ones to fly the aircraft as the planes were ordered before the combination. All the 43 Airbus SAS planes bought by Indian Airlines are operated by pilots from that company even after the merger, according to the Indian Pilots’ Guild, which represents about a third of Air India’s 1,500 current pilots.

An Air India pilot will have to work at least 14 years before earning promotion as a commander if pilots from Indian Airlines are also allowed to fly the new jets, said Amit Jain, a member of the Guild.

Calling in Sick

Members of the union have called in sick since May 7, forcing the carrier to cut flights to Hong Kong, Osaka and Toronto. Domestic services have largely been unaffected. Minister Singh canceled plans to attend the 787 handover because of the pilots dispute.

The carrier sent 30 pilots each from Air India and the old Indian Airlines to Singapore for training on the 787, according to Singh. The company will have 8 pilots for each Dreamliner, the first wide-body aircraft to join Air India’s fleet in more than two years.

The Dreamliners were part of a wider fleet expansion plan that was meant to turn Air India into a major international carrier. The government combined the company with Indian Airlines to bolster its network and help it expand overseas.

Instead, the merger has left Air India mired in 438 billion rupees of debt, struggling to integrate different businesses and weighed down by labor disputes. Last year, the carrier canceled more than 1,000 flights as former Indian Airlines’ pilots stayed away from work for 10 days to complain about being paid less than their colleagues from old Air India.

‘Driven From Top’

India’s national auditor said in a report on the Ministry of Civil Aviation in 2011 that the merger was “ill-timed” and was decided without considering the difficulties involved in areas such as staff integration. The decision was “driven from the top,” said the Comptroller and Auditor General of India.

“The integration has been badly managed,” said CAPA’s Somaia. “The resolution of such human-resources issues is central to Air India’s turnaround.”

The carrier, once India’s biggest, has slipped to fourth- place behind newer private carriers, Jet Airways (India) Ltd. (JETIN), IndiGo and SpiceJet Ltd. (SJET), which have lower costs and fewer staff. The airline had 17.6 percent of the market in April, according to data published by the Directorate General of Civil Aviation.

The carrier may also post a loss of 70 billion rupees in the year ending March, the worst performance nationwide, CAPA said in a report last week. Air India probably lost 78.5 billion rupees last fiscal year, Minister Singh said in a written reply in parliament on April 25.

Billionaire Mallya

The government has injected 72 billion rupees into Air India since April 1, 2009. That support has weighed on other Indian carriers including Jet and billionaire Vijay Mallya’s Kingfisher Airlines Ltd. (KAIR), which have made losses while competing with the state-subsidized company.

The 787s may help Air India to start turning around its reputation, domestically and overseas, as the company is only the third carrier to receive one. All Nippon Airways Co. (9202) got the first in September followed by Japan Airlines Co. in March.

The Dreamliner marks a breakthrough as it’s the first aircraft to be built with a large plastic fuselage. That helps cut fuel usage as much as 20 percent and has allowed carriers to open new routes that were previously weren’t profitable with larger planes.

“The 787 will make a qualitative difference to Air India’s image and position,” said Harsh Vardhan, chairman of Starair Consulting, a New Delhi-based company that advises carriers. “But any strike creates a terrible damage to the brand value of an organization.”

To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

India’s Growth De-Rated as Rupee Constrains Subbarao: Economy

By Tushar Dhara and Kartik Goyal - May 24, 2012

India’s central bank chief pledged to take steps as needed to curb swings in the rupee as the currency’s slump threatens to stoke inflation and limit scope for interest-rate cuts.
“We will do whatever is necessary, consistent with our policy,” Governor Duvvuri Subbarao said late yesterday in Mussoorie, in north India. “We have taken action to improve the current flows, encourage inflows and also to curb speculation.”
The rupee’s 19 percent slump against the dollar in the past year, driven in part by the failure of Prime Minister Manmohan Singh to liberalize investment rules, adds pressures to an inflation rate already the highest among BRIC nations. The Reserve Bank of India will probably be unable to lower borrowing costs until October-to-December, Goldman Sachs Group Inc. said today as it downgraded its growth forecast for the country.
“The RBI has limited room to prop up the rupee,” said Arun Singh, a Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt. “The ball is in the government’s court. They need to act at a swift pace and give a positive signal to foreign investors about commitment to pending economic reforms. That will reverse the tide.”
India’s currency reached a record low of 56.3875 per dollar yesterday, before recouping some losses to close at 55.655. Its tumble in the past 12 months is the worst in a basket of 11 major Asian currencies tracked by Bloomberg. The BSE India Sensitive Index ended 1.7 percent higher. The yield on the 8.79 percent bonds due November 2021 fell one basis point, or 0.01 percentage point, to 8.5 percent.

Conserve the Reserves

With Greece’s election still weeks away and the risks of an escalation in Europe’s woes difficult to assess, the RBI may be wary in drawing down India’s reserves to support the rupee. The nation had $258 billion of foreign-exchange holdings as of May 11, down about $26 billion from the end of October, according to data compiled by Bloomberg.
“Intervention is increasingly becoming counter-productive as it is only breeding questions about adequacy of foreign- exchange reserves,” Indranil Sen Gupta, an economist at Bank of America Merrill Lynch in Mumbai, wrote in a note to clients yesterday.
As one response, India may issue a foreign-currency denominated bond of about $20 billion, Sen Gupta said. Barclays Plc analysts today also predicted a possible sale of dollar- denominated securities for non-resident Indian investors, perhaps through the State Bank of India.

No Dollar Bond

Even so, Subbarao said India isn’t contemplating selling sovereign bonds abroad. The Reserve Bank is continuously monitoring the exchange rate, he told reporters after attending a board meeting of the central bank.
Elsewhere in Asia, Japan today reported that core consumer prices, which exclude fresh food, rose 0.2 percent in April from a year earlier, showing the Bank of Japan remains distant from its 1 percent inflation target after years of falling prices. Singapore may announce that industrial output grew 4.1 percent in April from a year before, according to the median estimate in a Bloomberg News survey of economists.
In Europe, German consumer confidence for June as measured by the GfK survey is forecast to be unchanged at 5.6, according to the median estimate. French consumer confidence in May is also forecast to remain the same, a separate survey showed. Italy may say retail sales fell in March from the previous month.
In the U.S., a report due later today may show the Thomson Reuters/University of Michigan consumer confidence gauge was unchanged in May from a preliminary reading of 77.8, the highest level since January 2008, economists said.

Inflation Challenge

Goldman revised its forecast for India’s wholesale inflation gauge to a 6.5 percent gain for the fiscal year that began April 1, from 5 percent previously, citing higher food and fuel costs. Tushar Poddar, a Goldman economist in Mumbai, wrote in a note to clients that the RBI will now likely lower interest rates by half a percentage point in the final three months of 2012, compared with the 75 basis points previously seen.
India’s gross domestic product will increase 6.6 percent this fiscal year, down from 7.2 percent previously predicted, according to Goldman. Rohini Malkani, an economist at Citigroup Inc. in Mumbai, said in a note yesterday “there is now near- consensus that the India story has de-rated, with growth at best likely in the 6.5 percent to 7 percent range” this year.
India reports first-quarter GDP figures next week, forecast to show a year-on-year increase of 6 percent, according to the median estimate in a Bloomberg News survey.

Return to Risk

The rupee has also been hurt by a record trade deficit and reduced demand for emerging-market assets as Europe’s debt crisis dims the global outlook. Goldman predicts a rebound in coming months as risk appetite returns.
The currency’s slide may increase the cost of imports such as oil and stoke inflation, a risk underscored by Indian refiners’ decision to boost petrol prices yesterday.
India’s central bank this month stepped up the fight to steady the rupee. It curbed trading in currency derivatives to rein in volatility and moved to boost the supply of dollars by cutting the amount of overseas income companies can hold in foreign currency to 50 percent from 100 percent.
Officials have also raised interest rates on non-rupee deposits by as much as 300 basis points and freed up borrowing costs on foreign-exchange loans to exporters.

Gasoline Prices

State-run refiners including Indian Oil Corp. increased gasoline prices by 11 percent to 73.18 rupees ($1.31) a liter in New Delhi yesterday. Diesel, kerosene and cooking gas prices were left unchanged.
Subbarao said the central bank won’t rule out the possibility of selling dollars directly to oil refiners. India imports about 80 percent of its crude oil needs.
In March this year, he said the Reserve Bank of India only intervenes in the foreign-exchange market to curb swings in the rupee and prevent disruption to macroeconomic stability.
The governor yesterday reiterated the central bank’s stance that it will consider inflation and economic growth data before deciding on interest rates at the June 18 policy meeting.
The central bank lowered borrowing costs last month for the first time since 2009, by 50 basis points to 8 percent, to bolster spending at home. It also flagged price pressures from the fiscal deficit, energy costs and the weaker rupee.
Indian inflation quickened to 7.23 percent in April. That’s the fastest pace among the so-called BRIC group of biggest emerging markets that also includes Brazil, Russia and China.
While the headline gauge “surprised on the upside” last month, core inflation remains below 5 percent, Subbarao said.
Asia’s third-largest economy probably expanded 6.7 percent in the year through March 2012, less than the 8.4 percent pace recorded in each of the previous two fiscal years, according to the median estimate in a Bloomberg News survey.
Faltering efforts to liberalize the economy, uncertainty over tax changes and the highest BRIC fiscal deficit have damaged sentiment, deterring investment from abroad. Standard & Poor’s cut India’s credit outlook to negative from stable last month, putting at risk its investment grade status.
To contact the reporters on this story: Tushar Dhara in New Delhi at tdhara1@bloomberg.net; Kartik Goyal in New Delhi at kgoyal@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Balrampur Says Mills Losing Money on Controls: Corporate India

Balrampur Chini Mills Ltd. (BRCM), India’s best-performing sugar producer, says the industry will continue to lose money as state controls increase costs and a slump in global prices cuts margins on exports.

Prospects of falling profits have turned analysts the most bearish in at least nine months on Balrampur and Bajaj Hindusthan Ltd. (BJH), the country’s biggest maker of the sweetener, according to data compiled by Bloomberg. The federal government sets quarterly limits on sales by each mill to cap prices, while state administrations fix cane rates to help about 50 million farmers, a powerful voting bloc, earn more.

“Companies are making losses because of government regulation,” Vivek Saraogi, Balrampur’s managing director, said in an interview. “Until policy is reformed, companies will continue making losses.”

Balrampur, which reported losses in three quarters through December, may say profit in the three months ended March 31 plunged 75 percent from a year earlier to 283 million rupees ($5.1 million), according to the median estimate of three analysts compiled by Bloomberg. The Kolkata-based company is due to announce its earnings on May 28. A slump in New York futures to a 21-month low this week has reduced incentives for Indian sugar exporters, Saraogi said.
Shielding the Poor

Producers must also sell 10 percent of their output typically below market rates to the government for resale to the poor at a subsidized cost. Policy makers use such controls on essential commodities to cap inflation, a politically sensitive issue in India where the World Bank says about 75 percent of the population lives on less than $2 a day.

Rising cane prices and surplus sugar for a second year will also crimp earnings, said Manish Mahawar, an analyst at Prabhudas Lilladher Pvt. in Mumbai.

Cane prices set by state governments rose as much as 19 percent in the past year, leaving the country’s mills struggling to pay farmers. Producers owed growers 102 billion rupees in arrears as of March 15, Food Minister K.V. Thomas told parliament on April 30. Mills are losing as much as 4 rupees on every kilogram (2.2 pounds) of sugar produced in the northern state of Uttar Pradesh, the country’s biggest cane grower, according to the Indian Sugar Mills Association.
‘Negative Stance’

Production of the sweetener in the season starting Oct. 1 will probably match this year’s output of 25 million tons to 25.5 million tons, exceeding demand in the world’s biggest consuming nation, Thomas said last month.

“We are reiterating our negative stance on the sugar sector considering a surplus sugar year and higher cane cost leading to incremental burden on companies’ financials, primarily domestic-focus players like Balrampur Chini,” Prabhudas’s Mahawar, wrote in an e-mail.

The consensus analyst rating for Balrampur is 3.2, the lowest since September 2010, according to data compiled by Bloomberg. The rating for Bajaj is 1.89, the lowest since September. The consensus rating is the average within a range of one to five, with five being the highest.

Balrampur, which has rallied 47 percent this year in Mumbai, may decline to 44 rupees in a year, Mahawar, who has a “reduce” rating on the stock, said in a report dated April 16. The shares fell as much as 3.1 percent to 48.15 rupees before trading at 49.40 rupees at 10:01 a.m. in Mumbai today. Bajaj climbed 0.4 percent to 26.40 rupees, extending this year’s gains to 12 percent.
Not Attractive

“Domestic prices will be under pressure until and unless exports take place in a big way,” Sanjeev Singh, a Mumbai-based analyst at Centrum Broking Pvt., said in a phone interview.

Producers are being allowed to export an unlimited amount without prior approvals from the food ministry under a government decision announced on May 2. Shipments reached about 1.7 million tons so far this year, the Indian Sugar Mills Association estimates.

The government in January formed a panel headed by Chakravarthy Rangarajan, the top economic adviser to Prime Minister Manmohan Singh, to study demands for ending state controls. The group will give its report in six months, Rangarajan said Feb. 27.

“The government is running a huge subsidy budget and the sugar industry is put into forced losses” Saraogi said.

To contact the reporters on this story: Pratik Parija in New Delhi at pparija@bloomberg.net; Swansy Afonso in Mumbai at safonso2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

Halliburton Demand Spurs Vikas to Expand: Corporate India

By Prabhudatta Mishra - May 23, 2012

Vikas WSP Ltd. (VWSP) plans to more than double capacity to produce guar gum in India after surging demand for the product from Halliburton Co. to extract gas trapped in shale drove prices to a record.

The company will invest more than 2 billion rupees ($36 million) to set up two plants to make guar gum products in Rajasthan state that will increase capacity to 145,000 metric tons by April, Managing Director B.D. Agarwal said in a phone interview yesterday. Vikas, which has more than tripled in Mumbai this year, will use its own cash to fund the expansion.

Prices of guar gum, a thickening agent used in ice creams, drugs and in extracting crude oil, rallied more than nine-fold, forcing the Indian commodity market regulator to suspend futures trading in March. Record prices are boosting costs for Halliburton (HAL), the world’s largest provider of hydraulic- fracturing services, Chief Executive Officer Dave Lesar said in a conference call on April 18.

“We have not seen much decline in prices of guar gum even after futures trading was banned because of the demand” from the fracking industry, Krishna Reddy, an analyst at industry consultant Beroe Consulting (I) Pvt., said in a phone interview.

Vikas, the second-best performer in the 535-member BSE Small-Cap Index this year, fell 2 percent to 57.65 rupees in Mumbai yesterday. The company is India’s only publicly traded guar gum producer.

Halliburton and Baker Hughes Inc. (BHI) help companies drill and complete oil and gas wells using a pressure-pumping technique known as fracking, which blasts water mixed with sand and chemicals underground to free trapped hydrocarbons from shale formations. Guar is made into a thickening gel used to carry sand down a well and into the cracks created from fracturing.
Drilling Costs

The cost to drill and complete a well climbed 6 percent in 2010, a further 25 percent last year and is projected to grow 20 percent this year, according to a January presentation from Tulsa, Oklahoma-based industry consultant Spears & Associates.

“There is no alternative available at this point of time and we don’t see there will be any substitute in time to come,” Vikas’ Agarwal said. The company, based in Sri Ganganagar in Rajasthan state, adjacent to the Pakistan border, aims to sell 60 percent of its production to drillers next year from 50 percent, he said.

India accounts for more than 70 percent of the global production of guar, which means “cow food” in Hindi, according to the Multi Commodity Exchange of India Ltd. The seed is also grown in Pakistan and the U.S.
Normal Monsoon

Record prices may prompt farmers in India to boost the area under guar by as much as 50 percent next year, Beroe’s Reddy said. The crop was planted over 3.5 million hectares (8.6 million acres) this year, according to Jai Bharat Gum & Chemicals Ltd., India’s second-biggest exporter.

Guar gum prices rallied to a record 95,920 rupees ($1,711) per 100 kilograms on the National Commodity & Derivatives Exchange Ltd. in Mumbai on March 21, extending gains into a fourth year.

Prices may drop as much as 50 percent as normal monsoon rain boosts planting, Mitul Shah, managing director of Rama Industries, the third-largest shipper, said last month.

Vikas expects net income in the year that began on April 1 to climb to 5 billion rupees, Agarwal said. It posted profit of 1.22 billion rupees in the nine months ended Dec. 31, according to the company’s website.

India exported 403,675 tons of guar gum worth $617 million in the year ended March 31, 2011, according to the Agricultural & Processed Food Product Export Development Authority.

To contact the reporter on this story: Prabhudatta Mishra in New Delhi at pmishra8@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Sam Nagarajan at samnagarajan@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

NTPC Plans $15 Billion Coal Import Contract: Corporate India

By Kartikay Mehrotra - May 23, 2012

NTPC Ltd. (NTPC), India’s biggest power producer, said it plans to spend as much as $15 billion over a decade to secure overseas coal supplies as prices of the fuel tumble to a 19-month-low.

The utility may sign five- or 10-year contracts for the first time to import as much as 150 million metric tons of coal, Chairman Arup Roy Choudhury said by telephone from New Delhi yesterday. The cost will be $15 billion, assuming a rate of $100 a ton, he said. Production constraints at state monopoly Coal India Ltd. are forcing the New Delhi-based generator to step up purchases abroad.

“With coal prices where they are, this could be a good time to lay our foundation for future imports,” Choudhury said. “If we need more, we’ll buy it as we have in the past, 4 or 5 million tons at a time.”

State-owned NTPC is seeking to tackle bottlenecks after its failure to meet targets for generation and capacity addition sent its stock tumbling to a 3 1/2-year low last week. The country’s biggest utility needs to ensure availability of fuel as Prime Minister Manmohan Singh plans to spend $400 billion over the next five years to reduce blackouts in the world’s second-fastest growing major economy.
Shares

Shares of NTPC fell 0.2 percent to 141.05 rupees as of 9:54 a.m. in Mumbai trading. The stock is headed for a third annual loss, having declined 12 percent this year, compared with a 3.7 percent gain in the benchmark Sensitive Index. (SENSEX)

“Because of industry struggles, NTPC shares have scraped the bottom of the barrel,” said Rohit Singh, a Mumbai-based analyst with IDBI Capital Market Services Ltd., who has a buy recommendation on the stock. “They have taken a realistic approach to addressing the industry’s problems and should be on their way back up.”

NTPC posted its second straight drop in quarterly profit in the three months ended March 31 after fuel costs increased and its tax burden more than doubled. Power producers are paying almost double the price for imported coal to make up for the local shortfall, pushing up costs.

Rising U.S. coal exports and slowing economic growth in China, the world’s biggest importer of the fuel, have caused Asian benchmark prices to slide, according to Sanford C. Bernstein & Co. Power station coal for loading at Australia’s Newcastle Port fell 17 percent in the past year to $96.95 a ton in the week ended May 18, the lowest level since Oct. 8, 2010, according to IHS McCloskey data on Bloomberg.
Capacity Addition

Indian demand for imported coal is set to exceed China’s in the coming years, according to Bernstein, as the South Asian country adds to its installed capacity of 201.6 gigawatts.

NTPC is boosting imports even after Prime Minister Singh ordered Coal India, the world’s largest producer of the mineral, to sign fuel supply agreements with power companies. The utility, which plans to add 4,660 megawatts in the financial year ending March 31, has balked at signing a deal with Coal India. (COAL)

The fuel supply agreement would fail to penalize Coal India if it doesn’t meet its obligations, Choudhury said. While NTPC is in direct negotiations with Coal India, power companies have written to Singh’s office seeking liability against Coal India should the company fall short of its supply volumes.
Peak Deficit

“Falling coal prices provide an opportunity for everybody involved,” Michael Parker, a Hong Kong-based analyst at Bernstein, said in an interview on May 20. “NTPC will shore up its supplies while taking some of the heat off Coal India. This could be a sign of things to come across the Indian industry, which could catch up with China in imports.”

NTPC targets a 25 percent increase in coal imports to 16 million tons this year. It currently has an installed capacity of 37,514 megawatts, or 19 percent of the country’s total.

About one in four Indians lives without electricity as supplies aren’t enough for the entire population. The country plans to add 76 gigawatts of capacity in the next five years to help revive economic growth to 9 percent from 6.1 percent in the quarter ended Dec. 31.

India’s peak power deficit, or the shortfall in supplies during periods of high demand, was 9.5 percent in March, according to the Central Electricity Authority.

NTPC has rights to develop three coal mines in India with combined reserves of 2.8 billion tons, which won’t start production before 2013. Rivals, including Tata Power Co. (TPWR) and Reliance Power Ltd., have acquired stakes in Indonesian and Australian fields or local coal mines to secure fuel supplies.
Coal Output

NTPC, which achieved 65 percent of its capacity addition target for the year ended March 31, has $3.9 billion in cash and equivalents.

Coal India plans to lift output by 6.4 percent to 464 million tons in the year that started April 1 after missing its production target the previous year because rains stalled operations and environmental approvals for new mines were delayed. The prime minister’s office asked the mining company to sign supply accords with power companies and import the fuel if needed.

Industrialists including Anil Ambani, chairman of Reliance Power Ltd. (RPWR), Gautam Adani, chairman of Adani Power Ltd., and Tata Power Chairman Ratan Tata met Singh in January to seek increased coal supplies from local mines, faster environmental approvals for projects and tariff reforms that would allow utilities to pass on an increase in costs.
Cost of Power

“Agreeing to coal on a sheet of paper doesn’t solve the long list of problems for NTPC,” said Jagannadham Thunuguntla, chief strategist for SMC Global Securities Ltd. based in New Delhi. “India still has to help states afford the cost of power and there still isn’t a clear land acquisition policy for new plants. While this is good, NTPC still has a long road ahead.”

NTPC will close bidding on a 5 million ton coal import order on May 30 then begin developing terms for their long-term deal, Choudhury said.

“By agreeing to a bulk deal, this will make my power cheaper and more desirable for cash-strapped buyers,” he said. “Profit is an afterthought right now. If we meet our capacity and generation goals, then higher profits will follow.”

To contact the reporter on this story: Kartikay Mehrotra in New Delhi at kmehrotra2@bloomberg.net.

To contact the editor responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.

JSW Seeks African Coal to Beat Australian Rains: Corporate India

By Abhishek Shanker - May 22, 2012

JSW Steel Ltd. (JSTL), India’s second- largest importer of coking coal, is turning to Rio Tinto Group’s Mozambique mine this year for the fuel as weather and labor trouble in Australia threaten to disrupt output expansion plans.

Overseas purchases of coal to fire JSW’s blast furnaces will increase to 6.5 million metric tons in the year ending March 31 from about 5 million tons the previous year, Director Jayant Acharya said in an interview, without disclosing the quantity sought from the African mine. Supplies from Australia, the world’s biggest coking-coal exporter, have become erratic following rains and strikes in the first quarter, he said.

JSW, which imports all its coking coal needs, expects to increase steel production by at least 15 percent this fiscal year to 8.5 million tons, Chairman Sajjan Jindal said last week. Shipments from Rio’s Benga project, in which Tata Steel (TATA) Ltd. owns a 35 percent stake, will start from this quarter, Rio Chief Executive Officer Tom Albanese said on May 15.

“Africa, particularly Mozambique, is seeing new coal production and that’s good news for Indian buyers that are primarily dependent on Australia,” said Giriraj Daga, an analyst at Nirmal Bang Securities Ltd. in Mumbai. He has a “sell” rating on JSW.

JSW, which had a 3 percent decline in fourth-quarter profit due to higher costs, gained as much as 2.5 percent to 626.30 rupees and traded at 618.90 rupees as of 9:49 a.m. in Mumbai. The shares of India’s third-largest steelmaker have advanced 22 percent this year, compared with a 5.2 percent increase in the key Sensitive Index. (SENSEX)
Benga Quality

JSW expects coal from the Benga mine to meet its quality standards after imports from Vale SA’s mines in Mozambique last quarter matched specifications, Jayant Acharya said in the telephone interview yesterday. JSW has also increased coal purchases from the U.S., Colombia and Canada, he said. The company owns coking coal mines in the U.S.

“As a strategy, we need to source raw materials from various countries to protect against any risk that may impact supplies,” Acharya said. “While Australia is a big source, floods, rains and labor strikes have affected coal output.”

JSW, which expanded its biggest factory, in Karnataka, by 47 percent to 10 million tons in July, failed to achieve full production capacity because of a shortage of iron ore, the key raw material. India’s top court banned mining in the southern state’s iron-ore rich regions in August, citing environmental violations. Last month, it allowed some mines to seek government approval to resume operations.
Imports, Exports

Steel Authority of India Ltd., the nation’s largest importer of coking coal, buys as much as 70 percent of its requirement from overseas. The New Delhi-based, state-owned company, will probably increase purchases this year after its new capacity comes on stream by March. Tata Steel, India’s biggest producer, imports almost 45 percent of its coal needs.

Rio, the world’s third-largest miner, will export 4.1 million tons of coking coal to India this year from the Benga mine, Noticias newspaper reported on May 4, citing unidentified company officials. Vale’s Mozambique unit will probably export a similar quantity this year, Operations Manager Paulo Horta said on April 24.

Tata Steel, which is entitled to 40 percent of the output from the Benga mine, may start receiving supplies as early as this month, Managing Director H.M. Nerurkar said on May 18. The European unit will get as much as 800,000 tons, or about 10 percent of its coal requirements, from the mine, he said.

BHP Billiton Ltd., the world’s biggest coking-coal exporter, may miss deliveries from its Australian mines after labor strikes and rain affected output, Fiona Martin, a spokeswoman for the Melbourne-based company, said on April 2. Peabody Energy Corp., the largest U.S. coal producer, on March 23 said storms and flooding in Australia’s Queensland state will reduce first-quarter earnings by about $50 million.
La Nina

La Nina weather events affected the eastern part of Australia for a second consecutive year. The pattern, which passed in March, after peaking in January, brought higher-than- normal rainfall to the area, while causing droughts in the southern region of the U.S. and South America. A global shortage of coking coal sent quarterly contract prices soaring to a record $330 a ton last year after the worst rains in 50 years hit Queensland.

Coking coal prices may rebound as early as July from four straight quarterly declines as China and India seek raw material overseas to fire new steel production. Contract prices that fell to $206 a metric ton for the quarter ending June 30 may rebound to average $225 a ton this financial year, based on the mean estimate of 10 analysts, steelmakers and mining companies surveyed by Bloomberg last month.

To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.