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India Equity Research Reports, IPO and Stock News
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Metals & Mining
India
A repeat of 2010. Press reports suggest that coking coal contract prices for the June
quarter have settled at a record US$330/ton, up 46% sequentially and above the
previous high of US$300/ton in 2008. Along with an increase in contract iron prices of
at least 20%, the spike in coking coal may pressure the performance of non-integrated
players. However, companies with captive iron ore are well covered through the
increase in steel prices since December 2010. The performance of steel mills in 2011
may mirror 2010; strong 1H followed by a weak 2H. BUY Tata Steel and REDUCE JSW.
Newspaper reports indicate a steep increase in contract iron ore and coking coal prices
Press reports indicate that Nippon Steel has agreed to a coking coal price of US$330/ton with
Anglo American for the June 2011 quarter. The sequential spike in contract coking coal prices is
not a surprise and reflects impact on shipments from floods in Queensland (which accounts for a
majority share in the global sea-borne coking coal trade) at the beginning of the current year.
In addition, press reports also indicate that contract iron ore prices for the June 2011 quarter may
increase 20% to US$170/ton. A cumulative increase in cost of production for the June 2011
quarter will be ~US$120/ton (US$75/ton on account of coking coal and US$45/ton on iron ore) for
non-integrated steel players.
1H to show better profitability than 2H
Steel prices and profitability trend appear to be similar to 2010, wherein steel prices moved up in
1H in anticipation of a sharp increase in contract raw material prices. This drove aggressive
inventory restocking, which in turn led to a significant jump in production. This led to a strong 1H
performance. Through the course of the year, margins compressed as steel prices corrected, while
the impact of higher raw material costs impacted earnings. 2011 has started off on a similar note;
expected increase in raw material prices led to sharp increase in steel prices and drove up
production levels. HRC prices have increased by US$110/ton since December 2010; this largely
covers the expected increase in coking coal prices. However, concerns continue regarding the
recent softening in HRC prices (export offers down by US$58/ton) on growing concerns of
slowdown in China alongside the jump in production.
Back companies with captive raw material resources; BUY Tata Steel
Domestic steel mills have increased HRC prices by Rs4,500 since December 2010; this should cover
expected increase in coking coal prices. Companies with captive iron ore will benefit from any
further increase in steel prices driven by revision in contract iron ore prices. We highlight that
domestic steel prices are lagging landed cost of imports by 3% to 5% as against a premium of 2%
to 3%. This will also help cushion any potential softening of international steel prices. We maintain
our bias towards companies with captive raw material resources.
Tata Steel is our top pick in the ferrous space. Comfort on steel prices (our estimates based on
steel price of US$756/ton as against spot of US$820/ton), brownfield expansion and efforts taken
to stabilize performance of Corus will reap dividends. The stock is trading at an inexpensive
valuation of 5.7X FY2012E and 4.7X FY2013E EBITDA. We maintain our Cautious stance on JSW
Steel—non-captive source for iron ore, value destruction from expensive acquisition and a
potential increase in leverage prevents us from taking a positive view despite a steep correction in
the stock price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals & Mining
India
A repeat of 2010. Press reports suggest that coking coal contract prices for the June
quarter have settled at a record US$330/ton, up 46% sequentially and above the
previous high of US$300/ton in 2008. Along with an increase in contract iron prices of
at least 20%, the spike in coking coal may pressure the performance of non-integrated
players. However, companies with captive iron ore are well covered through the
increase in steel prices since December 2010. The performance of steel mills in 2011
may mirror 2010; strong 1H followed by a weak 2H. BUY Tata Steel and REDUCE JSW.
Newspaper reports indicate a steep increase in contract iron ore and coking coal prices
Press reports indicate that Nippon Steel has agreed to a coking coal price of US$330/ton with
Anglo American for the June 2011 quarter. The sequential spike in contract coking coal prices is
not a surprise and reflects impact on shipments from floods in Queensland (which accounts for a
majority share in the global sea-borne coking coal trade) at the beginning of the current year.
In addition, press reports also indicate that contract iron ore prices for the June 2011 quarter may
increase 20% to US$170/ton. A cumulative increase in cost of production for the June 2011
quarter will be ~US$120/ton (US$75/ton on account of coking coal and US$45/ton on iron ore) for
non-integrated steel players.
1H to show better profitability than 2H
Steel prices and profitability trend appear to be similar to 2010, wherein steel prices moved up in
1H in anticipation of a sharp increase in contract raw material prices. This drove aggressive
inventory restocking, which in turn led to a significant jump in production. This led to a strong 1H
performance. Through the course of the year, margins compressed as steel prices corrected, while
the impact of higher raw material costs impacted earnings. 2011 has started off on a similar note;
expected increase in raw material prices led to sharp increase in steel prices and drove up
production levels. HRC prices have increased by US$110/ton since December 2010; this largely
covers the expected increase in coking coal prices. However, concerns continue regarding the
recent softening in HRC prices (export offers down by US$58/ton) on growing concerns of
slowdown in China alongside the jump in production.
Back companies with captive raw material resources; BUY Tata Steel
Domestic steel mills have increased HRC prices by Rs4,500 since December 2010; this should cover
expected increase in coking coal prices. Companies with captive iron ore will benefit from any
further increase in steel prices driven by revision in contract iron ore prices. We highlight that
domestic steel prices are lagging landed cost of imports by 3% to 5% as against a premium of 2%
to 3%. This will also help cushion any potential softening of international steel prices. We maintain
our bias towards companies with captive raw material resources.
Tata Steel is our top pick in the ferrous space. Comfort on steel prices (our estimates based on
steel price of US$756/ton as against spot of US$820/ton), brownfield expansion and efforts taken
to stabilize performance of Corus will reap dividends. The stock is trading at an inexpensive
valuation of 5.7X FY2012E and 4.7X FY2013E EBITDA. We maintain our Cautious stance on JSW
Steel—non-captive source for iron ore, value destruction from expensive acquisition and a
potential increase in leverage prevents us from taking a positive view despite a steep correction in
the stock price.
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