Indian commodity conglomerate Essar Group has become the first company to use a reverse online auction to purchase LNG.

The group’s steelmaking arm Essar Steel used an e-auction to purchase LNG to power its steel mills.

In total Essar purchased 2 metric tonnes, with an equivalent US dollar value of US$3.5bn. This was done under the condition of supplier anonymity and using pre-signed legal agreements and cross-border contracts.

GTR understands that it was able to purchase just under 50% of its total energy requirement from suppliers around the world, using a bespoke, vendor-created auction portal.

LNG is usually traded on spot contracts, with prices negotiated when the requirement arises, between buyer and seller. Essar’s group treasurer Aashish Pitale says that moving to an e-auction system will allow it to take control of its end-to-end manufacturing cycle.

He explains that the company has steel furnaces around the world, which all require different grades of LNG. Over a period of six weeks, Essar arranged for suppliers to have access to the auction portal.

At the time of the auction, the buyer (Essar) was able to see the prices submitted by the sellers (LNG suppliers) for different grades. Deals were then locked in for various tenors up to five years, which Pitale says allows both buyer and seller to mitigate the volatility associated with LNG markets.

Asked why it took so long for someone to develop such a tool, Pitale replies: “It’s logical, but to execute successfully a system likes this needs large requirements of LNG. As one of the largest steel producers in the world, we had the need. It had to be coming from a larger producer as it would not be possible for smaller producers: it has to be a thing of scale.

“Also, we had to make sure it could be institutionalised. This is hopefully not a one-time thing, we want to use it again,” he adds.

The company will know over the two years of contracts locked in whether it has worked out successfully, after which they hope to roll out the system for use in other areas of business.

Essar has been moving towards a hedged business across the board, “hedging cracks” in crude among other areas.

In its steel-producing business, it already had locked in contracts for offtake and iron ore purchase. By doing so with LNG, it nails down the final variable in the production cycle to some level of predictability.

This, however, is the first use of electronic auctions and Pitale hopes it will help assuage shareholders who may be fearful over the general economic climate, as well as press reports over the company’s indebtedness.

With the steel crisis ongoing around the world and Chinese steel continuing to flood markets, banks have been pulling back from the sector. Earlier this year, creditors asked Essar Group to shed some of its highly-leveraged steel assets, built using debt finance at the beginning of the decade.

Pitale confirms this is still ongoing, but says that the past few months have seen some improvement in business, due to the slight uptick in steel prices. Plants are now running at 80-85% capacity, he says, compared with 70% last year.