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SC bans iron ore mining in the other 2 regions of Karnataka: As per media
reports (CNBC, Bloomberg), the Supreme Court has banned iron ore mining in
the other 2 regions o Karnataka- Tumkur and Chitradurga. Last Friday the
Central Empowered Committee (CEC) panel had recommended that the ban be
extended to these 2 regions after banning in the Bellary region.
Companies impacted: Sesa Goa (NR) with a capacity to mine up to 6MT from
these regions would be impacted. On the steel front, JSW (N) would be
impacted as it would need to source more iron ore from outside the state and the
transportation cost from other states like Chattisgarh and Orissa is significantly
high (transportation cost/MT could be as high as Rs1000/MT). The CEC panel
report had also mentioned that around 25MT of iron ore inventory lying in
Karnataka should be sold to the steel industry, though the report had no mention
about the price at which the iron ore can be sold. So far we have no details on
this point in today's judgment. There are no details on NMDC (NR) production
details. The SC had earlier allowed only NMDC's mines in Bellary region to
mine. The earlier SC ruling had asked NMDC to increase production to
1MT/Month, which in our view is difficult, given in FY11 production stood at
5MT. Since August beginning, SESA has fallen 26%, JSTL 21% and NMDC by
12%.
Implications for iron ore export prices: Given that Karnataka iron ore exports
have been banned for more than a year, it should not have any direct impact on
iron ore exports. The impact would be felt in terms of how long the mining ban
continues, because the longer it continues, exports out of Orissa could be
impacted, as it could be diverted to meet domestic requirements.
Implications for domestic steel prices: We expect domestic steel prices to
move up. JSW, in our view, is 10% of India’s steel production and as much as
18% of FLAT steel production. We expect JSW to try and pass on much of the
higher cost (which would depend on at what price is the inventory sold at, as
NMDC’s fines prices at Rs2870, which works out to $64/MT are at a discount to
current export prices of $187/MT, even after adjusting for the export tax and
high transportation cost in Karnataka and in our view discount is between
Rs300-400/MT) which should allow steel prices to move up (which are
currently at a 6% discount to imported prices).
Can this ban continue for a prolonged period? While we do not have details
of the SC ruling, a prolonged mining ban can be very negative for one of India’s
largest steel companies- JSW Steel, which has ~ 10MT steel capacity and more
on the way. More importantly the State Government had recently pushed to
develop more steel plants in Karnataka given iron ore and land, but these plans
could take a hit.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SC bans iron ore mining in the other 2 regions of Karnataka: As per media
reports (CNBC, Bloomberg), the Supreme Court has banned iron ore mining in
the other 2 regions o Karnataka- Tumkur and Chitradurga. Last Friday the
Central Empowered Committee (CEC) panel had recommended that the ban be
extended to these 2 regions after banning in the Bellary region.
Companies impacted: Sesa Goa (NR) with a capacity to mine up to 6MT from
these regions would be impacted. On the steel front, JSW (N) would be
impacted as it would need to source more iron ore from outside the state and the
transportation cost from other states like Chattisgarh and Orissa is significantly
high (transportation cost/MT could be as high as Rs1000/MT). The CEC panel
report had also mentioned that around 25MT of iron ore inventory lying in
Karnataka should be sold to the steel industry, though the report had no mention
about the price at which the iron ore can be sold. So far we have no details on
this point in today's judgment. There are no details on NMDC (NR) production
details. The SC had earlier allowed only NMDC's mines in Bellary region to
mine. The earlier SC ruling had asked NMDC to increase production to
1MT/Month, which in our view is difficult, given in FY11 production stood at
5MT. Since August beginning, SESA has fallen 26%, JSTL 21% and NMDC by
12%.
Implications for iron ore export prices: Given that Karnataka iron ore exports
have been banned for more than a year, it should not have any direct impact on
iron ore exports. The impact would be felt in terms of how long the mining ban
continues, because the longer it continues, exports out of Orissa could be
impacted, as it could be diverted to meet domestic requirements.
Implications for domestic steel prices: We expect domestic steel prices to
move up. JSW, in our view, is 10% of India’s steel production and as much as
18% of FLAT steel production. We expect JSW to try and pass on much of the
higher cost (which would depend on at what price is the inventory sold at, as
NMDC’s fines prices at Rs2870, which works out to $64/MT are at a discount to
current export prices of $187/MT, even after adjusting for the export tax and
high transportation cost in Karnataka and in our view discount is between
Rs300-400/MT) which should allow steel prices to move up (which are
currently at a 6% discount to imported prices).
Can this ban continue for a prolonged period? While we do not have details
of the SC ruling, a prolonged mining ban can be very negative for one of India’s
largest steel companies- JSW Steel, which has ~ 10MT steel capacity and more
on the way. More importantly the State Government had recently pushed to
develop more steel plants in Karnataka given iron ore and land, but these plans
could take a hit.
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