SAIL has tested a sample of Mongolian coking coal as part of efforts to reduce heavy reliance on Australian imports. For investors, the focus is on whether logistics costs make this alternative viable, given that coking coal is a major cost driver for steel production in India.
Steel Authority of India (SAIL) is evaluating Mongolian coking coal as a potential alternative to its current heavy dependence on Australian imports. The state-run steel producer recently airlifted a one-metric-ton sample to test its suitability for steel manufacturing. This move is part of a broader strategy by Indian steelmakers to diversify raw material sourcing and reduce vulnerabilities in the supply chain.
Coking coal is the most significant raw material expense in the steel-making process, often accounting for nearly 40% of production costs. Currently, India meets about 95% of its coking coal needs through imports, with Australia serving as the primary supplier for more than half of that volume. Any disruption or price volatility in the Australian market can directly squeeze the profit margins of domestic steel companies.
However, the path to sourcing from Mongolia involves significant logistical challenges. Mongolia is a landlocked nation, bordered by China and Russia. Transporting coal from Mongolia to Indian ports is more complex and expensive compared to sea-based routes from Australia. Indian authorities are cautious about relying on routes through China due to geopolitical tensions, leading to a focus on the longer and costlier route via Russia.
For investors, the key factor is the ultimate cost efficiency. While Mongolian coal quality is considered high-grade, the total landed cost—including mining, internal logistics, and sea freight—must be competitive with Australian imports to make long-term procurement viable. If transport costs through the Russian corridor prove too high, it could nullify the potential benefits of sourcing from a new region.
The domestic steel industry continues to face a gap between the demand for high-grade steel and the limited output of suitable quality coking coal from Indian mines. As a result, industry projections indicate that demand for imported coking coal will remain steady or grow in the near term. The results of SAIL’s sample test will determine if the company moves forward with formal long-term supply agreements. Investors should monitor management commentary regarding the feasibility of this route, particularly any impact on operational costs or margin stability in future quarters.