The world's third-largest importer of coking coal shipped in 32.2 million tonnes last year. The use of low-grade iron ore would mean more coal purchases from traditional suppliers such as Australia, South Africa and the United States - helping support prices even if demand from China tapers.
But it would not help in the country's efforts to reduce its trade deficit and shore up a weak rupee currency.
"Some of the lower-quality iron ores mined in India have a higher than normal alumina content, which leads to higher slagging (residue from smelting of ore) in the blast furnace," said Jim Truman, principal coal analyst at energy consultancy Wood Mackenzie.
"As a result, when using more of this product, blast furnaces require higher levels of heat."
Domestic steel companies have traditionally preferred high-grade ores as every percentage point increase in iron content improves productivity by 2 percentage points and reduces coking coal consumption by 1 percentage point, according to the Indian Bureau of Mines. Ore with more than 64 per cent iron is regarded as high grade.
But mining bans in key producing states have forced Indian steel companies to adopt methods to be able to use even low-quality ores - containing as low as 48 per cent iron -accumulated over the years.
Many of the so-called beneficiation plants - which extract waste material from ore and increase its iron concentration - built by companies such as JSW Steel Ltd, Essar Steel and Monnet Ispat & Energy are struggling with the high percentage of alumina as well as silica.
"The problem that is coming up today is that low-grade ores contain very high alumina and silica which cannot be taken out during the beneficiation process," said Seshagiri Rao, joint managing director of JSW Steel, India's third-biggest steel firm by market value. "That's when fuel consumption goes up."
Rao said the company's coking coal consumption could rise about 15 per cent this fiscal year mainly due to the use of low-grade iron ores. JSW Steel imports all of its coal needs - about 14 million tonnes last fiscal year - due to a shortage at home.
Kalyani Steels Ltd's imports of coke - derived by heating coking coal - would rise 50 per cent to 150,000 tonnes this fiscal year as it uses low-grade iron ore and adds capacity, Managing Director RK Goyal told Reuters.
OUTPUT TRAILS DEMAND
About 770 kg of coking coal and 1,400 kg of high-grade ore are required to produce 1 tonne of steel, according to industry estimates. Though coking coal is slightly costlier than iron ore, steelmakers prefer importing coal due to the lower volume.
India produced 49.4 million tonnes of coking coal last fiscal year, with state-run monopoly Coal India Ltd accounting for most of that.
The miner's inability to raise output of thermal and coking coal in line with demand has meant India has become the third-largest importer of the fuel despite sitting on the world's fifth-largest reserves, as per a BP Plc estimate.
Despite the higher fuel requirement, India's consumption of low-grade iron ore is expected to rise to about 120 million tonnes by 2020 from about 80 million tonnes in the past fiscal year, said N.K. Nanda, technical director at NMDC Ltd, India's top iron ore producer.
In a measure of things to come, Kalyani Steels' Goyal said the company would bid for some of the 11.5 million tonnes of low-quality iron ore that Goa would auction. The state used to export all of its ore mainly to China before a ban last year.
"It's a developmental process," said Goyal. "Earlier nobody had a sinter plant, nobody had pellet plants (which could utilize low grade ores) because sufficient iron ore was available and good quality iron ore was available cheap."
Copyright: Thomson Reuters 2013