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JSW STEEL: RAW MATERIAL SHORTAGE
Keep the recourse ready
For JSW Steel, the mining ban in Karnataka has had significant short term implications. Although temporary, they do hold valuable long term lessons
Issue Date - 10/11/2011
 
Abad quarter can come once in a while as an aberration. But sometimes, even aberrations have a tendency to outdo themselves.

For the $7 billion JSW Group, the second quarter of the current fiscal is a case in point, for the company suffered a whopping 71% dip yoy in its net profit. In the midst of a legal quagmire over availability of iron ore for its 10 mtpa (million tonne per annum) Vijaynagar plant, its production level has also dropped to half its original capacity. JSW did post higher sales and production numbers, but its Profit After Tax (PAT) still shrank to Rs.1.27 billion from Rs.4.45 billion for the same quarter last year. The turnover and net sales for the second quarter stood at Rs.82.42 billion and Rs.76.25 billion respectively, showing a growth of 33% yoy, mainly due to a higher volume and an improved sales realisation. EBIDTA for the quarter is Rs.13.32 billion, up by 15% yoy. The company has posted a net profit after tax of Rs.1.27 billion after considering foreign exchange translation losses.

The shortage of its prime raw material iron ore is the main reason why the company is facing this perilous situation. Ironically, there is little that the company can do at the moment. After the SC order to ban mining in Bellary, Tumkur and Chitradurga in Karnataka after the controversies over significant iron ore degradation in the region, a number of steel companies have been affected. For JSW Steel, which is planning to take the capacity of its mega steel plant in Vijaynagarto 12 MTPA by 2014 (10.2 MTPA currently), the impact is much greater. Although the SC allowed NMDC to mine 1 million tonnes per month from its two minesa and allowed e-auctions of 1.5 million tonnes every month, the output is far from adequate for the steel producers. Due to that, the prices of the ore have also gone up drastically. As an alternate measure, the company is attempting to source some amount of iron ore from neighbouring Goa, Orissa & Chattisgarh. In August, production levels at the Vijaynagar plant dipped to 28% owing to the shortage, which officials say have improved to about 50 to 60% levels in October. “High procurement cost of iron ore from neighbouring states and the subsequent e-auction basis to sustain an optimum level of steel production from its Vijayanagar plant, the company’s cost of production went up by Rs.1,500 per tonne in Q2 FY12 as against Q2 FY11,” JSW’s group CFO Seshagiri Rao shared with B&E. The company’s production was lower at least by 4,50,000 tonnes due to acute shortage of iron ore and higher procurement cost of iron ore also increased the cost of production of steel by about Rs.1,500 per tonne during the quarter.

 
JSW took the cue from the Supreme Court permissions and procured 2.08 million tonnes in the e-auctions. But the company is yet to improve capacity utilisation significantly from existing levels as the receipt of the e-auction material is taking a considerably longer time due to procedural delays and logistical constraints. They have received only around 18% of the supplies committed. No wonder then that the company is forced to revise its outlook for steel production further downwards to 7.5 mtpa (crude steel production, original guidance 8.75 mtpa) and 7.8 mtpa (saleable steel sales, original guidance 9 mtpa) for the full year ending March 2012.

However, a price rise for its various flat, long, rolled and pelleted steel products is not yet anticipated by the management in the near future. “While the demand so far had been highly subdued with the festive season on, it is gradually improving. But the company will not go ahead with another round of price hikes in the current quarter,” Jayant Acharya, Director - Commercial and Marketing, said when asked about JSW’s plans to pass on the higher costs to its consumers. That is bad news for its margins going forward as well. “The company has been able to successfully procure iron ore for the next 45 days or so, but that is at a very high price. They will be able to operate at 70-90% capacity. They operated for a very brief period at 30% capacity, but I don’t think that they will really be able to preserve their margin going ahead,” S.P. Tulsian, stock broker and analyst said after the JSW results for second quarter of 2011. According to broking agency IIFL, earning prospects for JSW are still very good as some of the other steel companies like SAIL and TATA Steel are lagging behind their expansion plans or realisations are awaited by 2014 for their capital expansion plans.

So, how soon is a recovery expected? Legal analysts see that the Supreme Courts stand on iron ore mining ban is still to continue for the next four to five months at least. Steel Ministry data reveals that while production growth in steel has been achieved at 10% levels, demand for the alloy has only grown by 2%. Officials state that this is because a lot of infrastructure projects are still stuck in the clearance pipeline. Post-January 2012, the clearances are expected to be given, after which steel prices may gain their wings again. India envisages huge spend in developing infrastructures in the current year and expects a $1 trillion spend on infrastructure facilities in the 12th plan period (2013-2017). Demand for automotive steel is also on the growth curve along with long steel products that are needed mainly for construction activities. JSW has already inked a supply contract with Tata Motors for this.

          

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