JPMorgan:: MOIL 2QFY12 Mn ore price cut by 6%; 1QFY12 demand remains weak

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MOIL Ltd
Overweight
MOIL.BO, MOIL IN
2QFY12 Mn ore price cut by 6%; 1QFY12 demand remains weak


 MOIL  cut  2QFY12  Mn  ore  prices  by  ~6%  q/q:  As  per  the  pricing
data announced for 2QFY12 by the company, blended prices for Mn ore
have been cut by ~6%  from the lowered prices of late-May  (and ~10%
from  the  prices  announced  in  the  beginning  of  1QFY12).  Prices  for
ferro-grade Mn ore (higher grade) were cut by ~10%, while the price for
silico  manganese  grade  was cut  by  5-8%  from  the  revised May-11
levels.  MOIL  had  sharply  cut prices  in 1QFY12 given  the  increasing
pressure from declining Mn ore prices in the global market and the large
inventory  at  Chinese  port (nearly  4MT).  During  1QFY12,  the  blended
price for ferro-grade Mn ore available with MOIL was cut by 12% in the
beginning of the quarter and by another 18% on 23-May-11. As per news
reports (MetalFirst), the Chinese Mn ore and alloy market became active
in  June after a weak trend in Apr-May, however, high port inventory is
likely to keep Mn ore prices under pressure.    
 Availability of  higher grade Mn  ore improves again in 2QFY12: As
highlighted previously, the product mix that adversely impacted MOIL’s
relaizations  in  2HFY11  has  improved  further.  As  per  the  data  on
available quantity published with the pricing, proportion of higher priced
ferro-grade ore (price Rs7,000-12,000) increased  from 28% in 3QFY11
to  42%  in  the  data  published  for  2QFY12.  Lower-margin  fines (prices
Rs2,200-3,800) saw share decline to 14% for 2QFY12 from around 43%
in  3QFY11. This  should  help  offset  the  sharp  decline  in base  prices
during the  quarter, therfore, leadinb to  blended  prices remaining nearly
flat  (even  after  the  sharp  price  decline  at  the  start  of  1QFY11) and
revised downwards by only 5% in late-May.  
 Available  quantity  increased  sharply:  As  per  the  data released,  the
total quantity available increased from 124kt as of 23-May-11 to 335kt in
the beginning of July-11. While part of the increase in quantity available
is seasonal (given monsoon impacts mining activities), in our view, weak
steel  industry  trends  in  1QFY12  could  have  led  to  higher  inventory
levels.
 1QFY12E earnings preview: Lower prices and weak volume trends:
We expect the MOIL to report a soft 1Q given the price cut implemented
over  the  last  few  months and  also  tepid  demand  trends. We  estimate
average relaizations to decline ~7% q/q and volumes to  decline ~6% q/q
and ~10% y/y. In our view, volumes in the first half of the quarter were
likely  impacted  by  the  lower  priced  imports  (given  declining  global
prices),  which  resulted  in  another  price  cut  on  23-May. We  expect
1QFY12  EBITDA  at  Rs1.4bn  (-12%  q/q  and  -44%  y/y) and  PAT  of
Rs1.2bn (-33% y/y).