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Essar Group said its purchase of Trinity Coal Corp., the Indian company’s first overseas coal mine acquisition, will help lock in raw materials with coal and iron ore prices poised to rise as the global economy recovers.

The $600 million buyout of West Virginia-based Trinity raises Essar’s total U.S. investment to $4 billion, Chief Executive Officer Prashant Ruia said. The Mumbai-based group has since 2007 bought an iron ore mine in Minnesota and a Canadian steel plant. The latest purchase adds 200 million metric tons of coal reserves to Essar’s portfolio.

“The objective here is to secure the raw materials, first in terms of availability, and secondly in terms of cost at which we can acquire it,” Ruia said at a weekend news conference. Half of Trinity’s 7 million tons in annual output will be shipped to Essar’s Algoma steel plant in Ontario to reduce costs, he said.

Essar may raise as much as $3 billion by listing its oil and power assets on the London Stock Exchange in what would be India’s biggest overseas share sale, the Financial Times reported yesterday. Funds raised from the sale would help finance the group’s expansion plans. The listing could raise as much as $8 billion, the Sunday Telegraph said yesterday.

Steelmakers are bracing for a rebound in the prices of raw materials like coking coal and iron ore used to make steel as annual negotiations are under way to fix benchmark contract prices starting April 1. Last week, BHP Billiton Ltd., the world’s largest coking-coal exporter, won a 55 percent price increase from Japan-based JFE Holdings Inc.’s steel unit in the first three-month contract ever signed for coking coal.

‘Pricing Pressure’

“We see pricing pressure for commodities. We see a big push up currently in coal,” Ruia said of JFE’s decision to accept a quarterly contract. “There are bigger players who are right now trying to determine the contours of long-term agreements. We’ll just have to see what comes out.”

Essar has appointed JPMorgan Cazenove as adviser for an initial public offering of its refinery, power, exploration and production units in the U.K., the Sunday Telegraph said, citing an unidentified source. Essar Group spokesman Swastayan Roy declined to comment on the report.

Ruia said Trinity’s coking-coal output will fully meet the needs of the 4 million-ton-a-year Algoma steel plant. Trinity’s remaining output of thermal coal used in power generation will continue to be sold to U.S. utilities, he said.

Competition

“Given the growth in India and our own business, we will continue to look at acquisitions and further consolidation in this mineral space,” Ruia said. “Demand for minerals in India is high and only growing. There aren’t sufficient resources in India to meet that.”

Essar, controlled by billionaire brothers Shashi and Ravi Ruia, faces competition from Indian and foreign rivals in the hunt to secure mining assets as the costs of coal and iron ore escalate. South Korea’s Posco, Asia’s most profitable steelmaker, will “aggressively” pursue investments in overseas mines, Chief Executive Chung Joon Yang said Feb. 26.

New Delhi-based Jindal Steel & Power Ltd. vied with China’s Meijin Energy Group to takeover Australian coal producer Rocklands Richfield Ltd. The Sydney-based miner rejected Jindal Steel’s A$170 million ($154 million) offer in February. Jindal Steel Chief Financial Officer Rajesh Bhatia said Feb 5 it still wants to pursue a deal.

Rising Demand

JSW Steel Ltd., India’s third-biggest producer, may spend $500 million to buy coal mines overseas to secure supplies, Managing Director Sajjan Jindal said in an interview Nov. 17 after the company failed to find coking coal in Mozambique.

India’s top three steel producers – Tata Steel Ltd., state- run Steel Authority of India Ltd., and JSW Steel – will jointly need 25.5 million tons of coking coal in 2010 to 2011. Half of that will need to be imported, according to figures released by the companies last week.

Those imports come amid forecasts of a steep surge in international prices. Coking-coal prices will double in the next two years, Nomura Holdings Inc. said in a March 1 report.

Contract prices are $129 a ton for the year ending March 31. Starting April, JFE agreed to pay Melbourne-based BHP $200 a metric ton for a three-month supply. BHP was seeking $240 this year, UBS AG said Feb. 18.

Expansion

Including thermal coal needed for power generation, imports by India, the world’s second-most populous nation, will rise 30 percent to 76 million tons in the 2010 fiscal year, according a January estimate by mjunction Services Ltd., a Web-based trader backed by the country’s biggest steel producers. Imports will rise to 110 million tons in 2012, it said.

Ruia said it would take “a couple of years” to raise Trinity’s output to 10 million tons per year. Trinity owns and operates six mining complexes in Kentucky and West Virginia.

Essar paid $1.7 billion in 2007 to buy Minnesota Steel Industries LLC and is investing an additional $1 billion in the unit to develop an iron-ore mine and set up a steel plant, Ruia said. It paid $1.63 billion in 2007 to buy Algoma Steel Inc.

Essar may sell stakes in its oil and shipping units as part of a global expansion plan to add steel capacity, Ruia said in an interview Oct. 8.

The group’s annual steel capacity is 14 million tons, which it plans to raise to 25 million tons, according to its Web site. Essar also holds a stake in a steel plant in Indonesia.

source : bloomberg.com

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