"Tata Steel Expects 15% Jump in Raw Material Costs"

By RAJESH ROY

NEW DELHI - Make Money Blog$– Tata Steel Ltd. expects its raw material costs to increase around 15% in the next fiscal year starting April 1, mainly due to recent floods in Australia and higher demand from China, a top executive of the company said Thursday.

"We expect a rise of around $1 billion in raw material costs this fiscal," Kees Gerretse, group director for procurement and transport, Tata Steel Group, said on the sidelines of an industry conference.

In the fiscal year ended March 2010, the company spent around $6 billion on the purchase of key raw materials such as coking coal, iron ore and metallurgical coke.

The company buys around 25 million-27 million tons of iron ore for its European operations and 17 million tons of coking coal for Europe and India.

Tata Steel Group has an annual budget of $15 billion-$18 billion for procurement and transport of raw materials and typically spends around 60% on securing raw materials for its steel mills.

Raw material costs account for 60% of the costs of steelmaking.

Global iron ore prices are expected to rise 17% in the quarter starting April 1, while coking coal contract prices are likely to be fixed above $300 per ton, higher than the $225 per ton for the current quarter.

"Steel prices will go up with the hike in the raw material costs," Mr. Gerretse said.

Mr. Gerretse said the company's main concern was volatility in raw material prices and monthly contracts in these would make it more volatile.

However, coking coal prices are expected to normalize by August, he added.

The company is now focusing on developing the three mining projects it has undertaken in the Ivory Coast, Canada and Mozambique.

The company plans to mine 800,000 tons a year of coking coal from Mozambique from July and raise production to 2 million tons per year over the next two years, he added.

Tata Steel has also joined forces with Canada's New Millennium Capital Corp. to develop potentially large-scale iron ore reserves in Labrador and Quebec.

Mr. Gerretse said the company will start mining from Canada in 2014.

"But we are looking at opportunities around the world for buying iron ore and coking coal assets," he said, adding that the company would prefer greenfield projects.

The company's European operations are currently operating at 80%-85% capacity, while in India it is running at 100% capacity, he added.

In Europe, steel demand is yet to pick up from the construction sector, although offtake is good from the automotive sector, he said, adding that Indian demand continues to remain strong.

"Even as the demand environment remains strong, rising headwinds from cost pressures continue to be a cause of concern for the company," said a local analyst.

Write to Rajesh Roy at rajesh.roy@dowjones.com

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