A Glencore-led (GLEN.L) consortium, including Nippon Steel, sealed one of the mining sector's biggest deals in years this month, agreeing to buy Canadian miner Teck Resources' (TECKb.TO) steelmaking coal unit for $9 billion. The Japanese company will pay around $1.34 billion for a 20% stake.
"Coking coal prices are expected to rise as supply will get tighter in the medium term as there has been little investment in mines due to carbon-neutral push," executive vice president Takahiro Mori told Reuters in an interview on Tuesday.
"So, it's extremely important to secure our own interests," he said.
Japan's top steelmaker already owns stakes in several coking coal mines, which account for about a fifth of its annual coal imports totalling 25 million metric tons. The latest deal will boost that share to around 30%.
About 60% of Nippon Steel's products are sold for term customers with a mechanism that adjusts selling prices to raw materials costs, but 40% are commodity products that are affected by steel market fluctuation.
"We would like to raise the self-sufficiency ratio to around 40% in order to neutralize the impact of raw material prices on market products," he said, referring to both coal and iron ore.
It now procures 20% of its 50 million tons of iron ore imports from its equity holdings.
The 20% stake in Teck's coking coal business will also boost Nippon Steel's annual profit by about 70-80 billion yen ($476-543 million) based on the current prices, Mori said.
Early this month, the group lifted its net profit forecast by 11% to 420 billion yen for the year through end-March thanks to improved margins in the first-half.
Its profit from overseas business comes higher-than-usual thanks to a hefty special gain from its Indian joint venture with ArcelorMittal (MT.LU), which uses natural gas, instead of coking coal, to make steel, Mori said.
The unit, which hedges liquefied natural gas (LNG) prices through a long-term contract, booked the gain last year when it sold surplus rights to buy the fuel at lower prices when the spot market soared.
Although the gain was one-off, the unit will continue to hedge LNG prices to avoid risk of price volatility, Mori said.
($1 = 147.2100 yen)
