India: Sponge iron manufacturers eyeing Russian coal as replacement for costlier South African imports

Increased availability of cheaper Russian coal coupled with its compatibility in sponge-making has nudged Indian domestic DRI producers to think of replacing their traditional choice, South African coal, with Russian supplies.

According to market participants, the specifications of Russian coal coming into India are suitable for sponge iron units and also quite economical. While South African 5500 NAR (RB2) coal prices have risen significantly post the Russia-Ukraine war that started in March, RB3 (4800 NAR) grade coal has gained prominence in the sponge iron sector in the last few months. However, since the past two months, this grade is also facing increased competition from high-CV Russian coal.

As per CoalMint assessment, Russian 6000 kcal/kg NAR grade coal is being booked at $185-190/t CIF India as against South African RB2 at $230/t CIF India (east coast).

Portside prices of 6100-6300 NAR grade Russian coal with FC of 55-56% are assessed at INR 17,000/t at Paradip Port as against South African RB2 coal (51-52% FC) at INR 17,400/t ex-Paradip and INR 17,000/t ex-Vizag.

RB3 coal (47-48% FC) prices are currently assessed at INR 15,000/t ex-Vizag. Prices exclude cess and GST.

Compatibility - Russian vs South African coal

As per market participants, Russian 6200 kcal/kg NAR grade coal with a fixed carbon (FC) above 55% is yielding positive results against South African coal which has comparatively lower FC and calorific value.

In fact, because of high carbon content, only 0.7 t of Russian coal is used against 0.8-0.9 t of RB2 (5500 NAR) and 1.1 t of RB3 (4800 NAR) coal to make 1 t of DRI.

The only hurdle that Russian coal faces is lower volatile matter which is adjusted by blending it with domestic coal, informed sources.

In fact, a few reputed players, predominantly using domestic coal, are also blending Russian coal with high-CV coal from Eastern Coalfields Ltd. (ECL) in a 50:50 ratio.

"The emergence of Russian coal in the DRI space has come only because South African coal has been very expensive and is expected to remain so in the coming months. Manufacturers are currently focussed on building Russian coal inventory for the next three-four months as a series of vessels are lined up from September onwards," a sponge iron producer source said.

With regard to VT-1 grade Mozambique coal, the DRI units are concerned about its higher sulphur content which is why it has not gained much traction like Russian coal for sponge production.

South African coal prices rise

South African high-CV RB1 (6000 NAR) grade coal prices continue to trade higher with strong demand expectation from Europe as Russian energy giant Gazprom recently announced to halt its gas supply for three days. Prices rose by $9/t w-o-w to $344/t on FOB basis.

Currently, lower water levels in the Rhine river has also resulted in a sharp rise in vessel queues at Rotterdam and Amsterdam terminals.

South African coal bookings by Indian players were relatively low this week as they awaited more clarity on prices going ahead.

What lies ahead?

Given the quality and compatibility of Russian coal, its usage by domestic sponge iron manufacturers, even preference over South African coal, is likely to increase in the coming months. However, the rising imports of Russian supplies in the domestic market might not be able to replace the entire 26 mnt of South African coal demand in India.