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During 4QFY2011, the ferrous space witnessed a series of price
hikes due to higher raw-material prices. For the 1QFY2012
contract, coking coal prices have been settled at US $330/tonne
and iron ore prices are expected to be higher by nearly 20%.
Moreover, in an unexpected move, Coal India (CIL) hiked coal
prices for non-regulated sectors to pass on the anticipated wage
hike. Base metal prices were also volatile during the quarter.
In 4QFY2011, the BSE metals index lost 8.2% in absolute terms.
CIL topped by gaining 10.4% in absolute terms and
outperformed the Sensex by 15.6%, as it hiked prices for few
customers. In the ferrous space, SAIL, Tata Steel and JSW Steel
underperformed the Sensex by 1.8%, 3.4% and 16.9%,
respectively. NMDC outperformed the Sensex by 7.3%, while
Sesa Goa underperformed by 6.4% due to imposition of export
duty and increased railway freights. HZL and Nalco
outperformed by 5.8% and 2.8%, respectively. Whereas, Sterlite
and Hindalco underperformed by 1.9% and 10.0%, respectively.
Ferrous sector
During the quarter, steel companies hiked steel prices by
`2,500-3,000/tonne in January and February 2011 and by
marginal `350-500/tonne in March 2011, citing rising
raw-material prices. Meanwhile, NMDC also increased iron ore
prices by about 5% in the domestic market during 4QFY2011.
In 4QFY2011, average world HRC prices increased by 17.6%
qoq to US $794/tonne (up 28.9% yoy). Average Chinese export
prices also increased by 17.1% qoq and 29.5% yoy to
US $720/tonne. Average HRC prices in India increased by
17.5% qoq and 17.0% yoy to `41,333/tonne.
Domestic steel demand remains strong: As per the steel ministry,
Indian steel consumption for FY2011 is expected to grow at
10%. During April 2010-January 2011, steel consumption rose
by 8.6% to 56.1mn tonnes, while steel production grew by 8.0%.
Major events
Budget FY2012 - Neutral for the metals sector: The FY2012
Budget proposed 20% export duty on iron ore. The Budget had
a negative impact on Sesa Goa, as the company exports ~90%
of the total iron ore volumes. Nevertheless, no announcement
on the imposition of mining tax (26% at PBT) was a positive for
mining companies as well as steel companies with captive mines.
Sterlite completes the Anglo Zinc acquisition: In 4QFY2011,
Sterlite acquired Anglo's assets, which comprised a) 100% owned
Skorpion mine in Namibia (acquired for US $707mn),
b) 100% owned Lisheen mine in Ireland (acquired for
US $546mn including cash of US $275mn) and c) 74% owned
Black Mountain Mines (acquired for US $348mn). We believe
the acquisition is earnings accretive, given the low operating
cost structure of Anglo's mines and relatively higher metal prices.
CIL hikes coal prices for select customers: In 4QFY2011, CIL
increased coal prices for some of its customers. CIL has, however,
not increased tariffs for regulated sectors such as power, fertiliser
and defense (which account for ~80% of CIL's consumers).
The price hike by CIL was made to pass on the anticipated rise
in wage and dearness allowances.
Tata Steel raises stake in Riversdale: As per media reports,
Tata Steel has spent AUD100mn to raise its stake in Riversdale
Mining to 27.1% from 24.2%. We believe Tata Steel's investment
in Riversdale is of strategic importance and will help in increasing
the raw-material integration level at TSE in the long term.
Tata, New Millennium to develop taconite deposit: During the
quarter, Tata Steel signed an agreement with New Millennium
to develop the taconite iron ore deposit in Canada, which
includes the LabMag and the KeMag iron ore deposits.
Tata Steel will incur 64% of the project feasibility cost, estimated
at US $50mn. Upon the successful completion of the feasibility
study, the two companies will enter into a joint venture to develop
one or both of the deposits. Tata Steel will own 80% stake in the
JV, while New Millennium will hold the remaining 20% stake,
with an option to buy an additional 16% equity. Tata Steel will
invest up to CAD4.85bn if both deposits are developed and up
to CAD4.68bn and CAD3.76bn, respectively, if only the KeMag
or LabMag deposits are developed.
Sterlite's Tuticorin smelter to continue its operations: On February
28, the Supreme Court (SC) allowed Sterlite to keep its copper
smelter running until further ruling, extending its stay on the
Madras High Court's (HC) order to close the Tuticorin smelter.
The court has ordered the National Engineering Research
Institute to submit a new report on the copper smelter. We await
for more clarity as the matter will be taken up after eight weeks.
Sesa Goa acquires BSAL: On March 22, Sesa Goa acquired
assets of Bellary Steel & Alloys (BSAL) for `220cr. BSAL is setting
up a 0.5mn-tonne steel plant in Bellary and holds nearly 700
acres of land. As per the company, the acquisition will allow it
to venture into steel making in Karnataka. Sesa Goa is currently
reviewing options for commissioning the plant at the earliest.
However, we await management's verdict on the timeline, capex
to be spent and clearances and approvals for the project.
Indian Railways raises freight rates on iron ore exports:
Following the export duty hike, Indian Railways raised distance
charges on iron ore meant for exports by `100. In our view,
Sesa Goa will be marginally affected by this move as iron ore
exports from Karnataka have stopped, whereas its third-party
operations in Orissa have been discontinued.
SC permits exports of iron ore lying at ports: The SC, on
February 11, allowed the export of iron ore lying at major ports
of Karnataka. Moreover, the SC had asked the Karnataka state
government to come up with a new law by March 31, 2011,
that checks illegal mining. It further stated that mining companies
would be entitled to interim relief if the new law does not come
into force within the stipulated time period. However, there has
been no information on the new mining law as yet.
Indian iron ore exports to take a hit: According to the Ministry
of Mines, Indian iron ore exports for FY2011 are likely to be
around 90mn tonnes. Given the ongoing exports ban in
Karnataka and the increase in export duty, iron ore exports are
likely to further fall by 35% to 58mn tonnes in FY2012.
Indian iron ore exports to China for February 2011 declined by
29% yoy to 7mn tonnes. Total iron ore exports to China for
April 2010-February 2011 fell by 25.5% yoy to 79.4mn tonnes.
1QFY2012 raw-material prices fixed higher: According to
ABARE, the floods in Australia are expected to affect global
coking coal exports, leading to a decline of over 5% to 259mn
tonnes in CY2011. As a result, the settlement of benchmark
coking coal contracts for 1QFY2012 is substantially higher at
US $330/tonne (US $225/tonne for 4QFY2011). In case of
iron ore negotiations, media reports suggest a hike of ~20%
over 4QFY2011. During the quarter, average spot iron ore prices
for 63% Fe grade (CFR, China) were up by 36.9% yoy and
12.2% qoq to US $183/tonne.
Outlook
Raw-material cost pressure to persist in 4QFY2011, but reduce
going forward: We expect raw-material prices to remain volatile
as a result of floods in Australia and low supplies of iron ore
from India. However, lower demand from Japan due to steel
production cuts on account of the earthquake is expected to
keep further increases in iron ore price muted. Moreover, coking
coal prices may decline as the flood situation in Australia
normalises and normalcy in supply is restored.
According to World Steel, global capacity utilisation levels are
estimated at nearly 81% in 4QF20Y11, as compared to ~75%
in 3QFY2011. Despite increasing steel production across the
globe, we expect steel prices to remain firm during 1HFY2012
due to higher raw-material prices.
4QFY2011 expectations: For 4QFY2011, we expect sales
volumes to increase, aided by higher realisations. Thus, we
expect the top line of all the companies under our coverage to
grow by 11-17% yoy. However, due to relatively higher
raw-material costs, margins of steel companies are likely to
contract by 400-840bp yoy. For Sesa Goa, iron ore sales volume
is likely to be negatively affected; however, higher iron ore prices
will support top-line growth. We remain positive on Tata Steel,
SAIL and JSW Steel.
Non-ferrous sector
The quarter witnessed volatility as interest rates and bank reserve
requirements were hiked by China; and later base metals prices
fell sharply after an earthquake struck Japan in March, which
dampened the sentiment. As per media reports, for 1HCY2011,
BHP Billiton has finalised the TC/RC with Chinese smelters at
US $77/tonne and US $7.70/pound (+66% yoy).
During the quarter, average LME prices of copper, aluminium,
alumina, zinc and lead increased by 3-12% qoq and 5-34%
yoy. Copper touched new highs of US $10,180/tonne in
February 2011.
Outlook
In our view, the key positives for base metal prices are ongoing
economic recovery in developed economies, tight supply and
emergence of restocking activity. However, rising interest rates
and the Chinese government's efforts to curb the rising inflation
and property prices could be the dampeners.
We expect non-ferrous companies to register positive top-line
growth of 7-40%, owing to a surge in LME prices on a yoy
basis, except for Nalco, which is expected register a 4.3% decline
in its top line. On the operating front, while Hindalco is expected
to report margin expansion of 122bp yoy, margins of Hindustan
Zinc, Nalco and Sterlite are expected to contract by 350-540bp
yoy on account of higher operating cost. We maintain our
positive stance on Sterlite and Hindalco.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
During 4QFY2011, the ferrous space witnessed a series of price
hikes due to higher raw-material prices. For the 1QFY2012
contract, coking coal prices have been settled at US $330/tonne
and iron ore prices are expected to be higher by nearly 20%.
Moreover, in an unexpected move, Coal India (CIL) hiked coal
prices for non-regulated sectors to pass on the anticipated wage
hike. Base metal prices were also volatile during the quarter.
In 4QFY2011, the BSE metals index lost 8.2% in absolute terms.
CIL topped by gaining 10.4% in absolute terms and
outperformed the Sensex by 15.6%, as it hiked prices for few
customers. In the ferrous space, SAIL, Tata Steel and JSW Steel
underperformed the Sensex by 1.8%, 3.4% and 16.9%,
respectively. NMDC outperformed the Sensex by 7.3%, while
Sesa Goa underperformed by 6.4% due to imposition of export
duty and increased railway freights. HZL and Nalco
outperformed by 5.8% and 2.8%, respectively. Whereas, Sterlite
and Hindalco underperformed by 1.9% and 10.0%, respectively.
Ferrous sector
During the quarter, steel companies hiked steel prices by
`2,500-3,000/tonne in January and February 2011 and by
marginal `350-500/tonne in March 2011, citing rising
raw-material prices. Meanwhile, NMDC also increased iron ore
prices by about 5% in the domestic market during 4QFY2011.
In 4QFY2011, average world HRC prices increased by 17.6%
qoq to US $794/tonne (up 28.9% yoy). Average Chinese export
prices also increased by 17.1% qoq and 29.5% yoy to
US $720/tonne. Average HRC prices in India increased by
17.5% qoq and 17.0% yoy to `41,333/tonne.
Domestic steel demand remains strong: As per the steel ministry,
Indian steel consumption for FY2011 is expected to grow at
10%. During April 2010-January 2011, steel consumption rose
by 8.6% to 56.1mn tonnes, while steel production grew by 8.0%.
Major events
Budget FY2012 - Neutral for the metals sector: The FY2012
Budget proposed 20% export duty on iron ore. The Budget had
a negative impact on Sesa Goa, as the company exports ~90%
of the total iron ore volumes. Nevertheless, no announcement
on the imposition of mining tax (26% at PBT) was a positive for
mining companies as well as steel companies with captive mines.
Sterlite completes the Anglo Zinc acquisition: In 4QFY2011,
Sterlite acquired Anglo's assets, which comprised a) 100% owned
Skorpion mine in Namibia (acquired for US $707mn),
b) 100% owned Lisheen mine in Ireland (acquired for
US $546mn including cash of US $275mn) and c) 74% owned
Black Mountain Mines (acquired for US $348mn). We believe
the acquisition is earnings accretive, given the low operating
cost structure of Anglo's mines and relatively higher metal prices.
CIL hikes coal prices for select customers: In 4QFY2011, CIL
increased coal prices for some of its customers. CIL has, however,
not increased tariffs for regulated sectors such as power, fertiliser
and defense (which account for ~80% of CIL's consumers).
The price hike by CIL was made to pass on the anticipated rise
in wage and dearness allowances.
Tata Steel raises stake in Riversdale: As per media reports,
Tata Steel has spent AUD100mn to raise its stake in Riversdale
Mining to 27.1% from 24.2%. We believe Tata Steel's investment
in Riversdale is of strategic importance and will help in increasing
the raw-material integration level at TSE in the long term.
Tata, New Millennium to develop taconite deposit: During the
quarter, Tata Steel signed an agreement with New Millennium
to develop the taconite iron ore deposit in Canada, which
includes the LabMag and the KeMag iron ore deposits.
Tata Steel will incur 64% of the project feasibility cost, estimated
at US $50mn. Upon the successful completion of the feasibility
study, the two companies will enter into a joint venture to develop
one or both of the deposits. Tata Steel will own 80% stake in the
JV, while New Millennium will hold the remaining 20% stake,
with an option to buy an additional 16% equity. Tata Steel will
invest up to CAD4.85bn if both deposits are developed and up
to CAD4.68bn and CAD3.76bn, respectively, if only the KeMag
or LabMag deposits are developed.
Sterlite's Tuticorin smelter to continue its operations: On February
28, the Supreme Court (SC) allowed Sterlite to keep its copper
smelter running until further ruling, extending its stay on the
Madras High Court's (HC) order to close the Tuticorin smelter.
The court has ordered the National Engineering Research
Institute to submit a new report on the copper smelter. We await
for more clarity as the matter will be taken up after eight weeks.
Sesa Goa acquires BSAL: On March 22, Sesa Goa acquired
assets of Bellary Steel & Alloys (BSAL) for `220cr. BSAL is setting
up a 0.5mn-tonne steel plant in Bellary and holds nearly 700
acres of land. As per the company, the acquisition will allow it
to venture into steel making in Karnataka. Sesa Goa is currently
reviewing options for commissioning the plant at the earliest.
However, we await management's verdict on the timeline, capex
to be spent and clearances and approvals for the project.
Indian Railways raises freight rates on iron ore exports:
Following the export duty hike, Indian Railways raised distance
charges on iron ore meant for exports by `100. In our view,
Sesa Goa will be marginally affected by this move as iron ore
exports from Karnataka have stopped, whereas its third-party
operations in Orissa have been discontinued.
SC permits exports of iron ore lying at ports: The SC, on
February 11, allowed the export of iron ore lying at major ports
of Karnataka. Moreover, the SC had asked the Karnataka state
government to come up with a new law by March 31, 2011,
that checks illegal mining. It further stated that mining companies
would be entitled to interim relief if the new law does not come
into force within the stipulated time period. However, there has
been no information on the new mining law as yet.
Indian iron ore exports to take a hit: According to the Ministry
of Mines, Indian iron ore exports for FY2011 are likely to be
around 90mn tonnes. Given the ongoing exports ban in
Karnataka and the increase in export duty, iron ore exports are
likely to further fall by 35% to 58mn tonnes in FY2012.
Indian iron ore exports to China for February 2011 declined by
29% yoy to 7mn tonnes. Total iron ore exports to China for
April 2010-February 2011 fell by 25.5% yoy to 79.4mn tonnes.
1QFY2012 raw-material prices fixed higher: According to
ABARE, the floods in Australia are expected to affect global
coking coal exports, leading to a decline of over 5% to 259mn
tonnes in CY2011. As a result, the settlement of benchmark
coking coal contracts for 1QFY2012 is substantially higher at
US $330/tonne (US $225/tonne for 4QFY2011). In case of
iron ore negotiations, media reports suggest a hike of ~20%
over 4QFY2011. During the quarter, average spot iron ore prices
for 63% Fe grade (CFR, China) were up by 36.9% yoy and
12.2% qoq to US $183/tonne.
Outlook
Raw-material cost pressure to persist in 4QFY2011, but reduce
going forward: We expect raw-material prices to remain volatile
as a result of floods in Australia and low supplies of iron ore
from India. However, lower demand from Japan due to steel
production cuts on account of the earthquake is expected to
keep further increases in iron ore price muted. Moreover, coking
coal prices may decline as the flood situation in Australia
normalises and normalcy in supply is restored.
According to World Steel, global capacity utilisation levels are
estimated at nearly 81% in 4QF20Y11, as compared to ~75%
in 3QFY2011. Despite increasing steel production across the
globe, we expect steel prices to remain firm during 1HFY2012
due to higher raw-material prices.
4QFY2011 expectations: For 4QFY2011, we expect sales
volumes to increase, aided by higher realisations. Thus, we
expect the top line of all the companies under our coverage to
grow by 11-17% yoy. However, due to relatively higher
raw-material costs, margins of steel companies are likely to
contract by 400-840bp yoy. For Sesa Goa, iron ore sales volume
is likely to be negatively affected; however, higher iron ore prices
will support top-line growth. We remain positive on Tata Steel,
SAIL and JSW Steel.
Non-ferrous sector
The quarter witnessed volatility as interest rates and bank reserve
requirements were hiked by China; and later base metals prices
fell sharply after an earthquake struck Japan in March, which
dampened the sentiment. As per media reports, for 1HCY2011,
BHP Billiton has finalised the TC/RC with Chinese smelters at
US $77/tonne and US $7.70/pound (+66% yoy).
During the quarter, average LME prices of copper, aluminium,
alumina, zinc and lead increased by 3-12% qoq and 5-34%
yoy. Copper touched new highs of US $10,180/tonne in
February 2011.
Outlook
In our view, the key positives for base metal prices are ongoing
economic recovery in developed economies, tight supply and
emergence of restocking activity. However, rising interest rates
and the Chinese government's efforts to curb the rising inflation
and property prices could be the dampeners.
We expect non-ferrous companies to register positive top-line
growth of 7-40%, owing to a surge in LME prices on a yoy
basis, except for Nalco, which is expected register a 4.3% decline
in its top line. On the operating front, while Hindalco is expected
to report margin expansion of 122bp yoy, margins of Hindustan
Zinc, Nalco and Sterlite are expected to contract by 350-540bp
yoy on account of higher operating cost. We maintain our
positive stance on Sterlite and Hindalco.
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