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On Friday the Supreme Court gave an order allowing
1.5mnt/month of iron ore e-auctions in Karnataka from the
supposed 25mt of inventory lying with miners. As and when this
inventory becomes available to steel producers, it should help
alleviate the crunch on ore in Karnataka.
● In our view, significant uncertainties remain: 1) JSW’s expectation
of shipments starting in 7-10 days may be too optimistic by a few
weeks given challenges in setting up procedures and finding
transport; 2) the grade of ore available (furnaces need consistent
grades for efficient production), 3) potential demand for it (Figure
1), and 4) willingness of miners to sell (they can’t be forced to).
● With demand likely to be higher than supply, and the key
competitors for ore – the pellet plants – seeing US$175/t pellet
prices and a ~US$60/t conversion cost, eventual prices are likely
to be far higher than the US$72 seen by JSW so far.
● With JSW’s current procurement at only 30kt/day (equivalent to
60% utilisation), and a sharp rise in costs ahead, we still find the
stock expensive. Maintain our Underperform, with a TP of Rs550.
Court orders e-Auction of Karnataka ore inventory
On Friday, the Supreme Court gave an order allowing 1.5mnt/month
of iron ore e-auctions in Karnataka from the supposed 25mt of
inventory lying with miners. Mining is still banned. Key features of the
order:
● No middlemen/traders can participate. Only Karnataka-based
steel plants and pellet/beneficiation plants can buy for domestic
sales. There are a large number of pellet plants in this region.
● The base price for e-Auctions will be based on NMDC prices.
● MSTC would be the authorised agency for conducting the
auctions.
● The Central Empowered Committee overseeing the crackdown on
illegal mining in Karnataka has recommended that a 10% royalty
be applicable. Sale proceeds will not be shared with miners who
have been alleged to mine illegally. Also, 80% of sales proceeds
would be given to the miner, the rest retained by the government.
● No overstocking will be allowed by buyers
● Physical verification of the stock will be conducted before the e-
Auction. Further, the stock would be re-weighed at one checkpoint
on the transportation route.
Still too early to assess impact on JSW
As and when this inventory becomes available to steel producers, it
would help alleviate the crunch on ore in Karnataka. However,
significant uncertainties still remain:
● Implementation timelines: Setting up e-auction procedures for
all miners, finalising the maximum requirements for each buyer,
issuing permits, etc will take time. So will the setting up of checkposts
for surveillance of loading/transportation/overstocking. We
think JSW’s expectation of getting ore from e-Auctions in 7-10
days is at least a few weeks too optimistic.
● Pricing: The final outcome from the auctions is likely to be a
substantial rise in iron ore prices. We don’t think miners will be
forced to sell, and only a few would be under cash flow pressures:
demand-supply dynamics are therefore uncertain. While JSW is
by far the largest and lowest cost producer of steel in the region,
several pelletisation plants can compete for iron ore (Figure 1).
● Grade of inventory: The actual grades available are not clear,
and all Furnaces/Beneficiation plants/Pellet plants can only work
efficiently with a certain consistent grade of ore. JSW
management guides to two thirds of the inventory being fines for
which there would not be too much competition – we disagree,
given the pelletisation capacity in the region.
There seems to be enough leeway for prices to rise: with cost of
conversion of fines to pellets being ~US$60/t, and pellets selling at
US$175/t, there is enough leeway for prices to go up substantially
higher than the US$72/t at which JSW currently buys.
JSW is able to procure only 30kt/day, which implies only 60%
utilisation levels. We think low utilisation will continue for longer, and
prices through e-auctions will be much higher than current
procurement prices. The stock’s rally In the face of this uncertainty
looks unjustified. We maintain our estimates and Rs550 target price.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
On Friday the Supreme Court gave an order allowing
1.5mnt/month of iron ore e-auctions in Karnataka from the
supposed 25mt of inventory lying with miners. As and when this
inventory becomes available to steel producers, it should help
alleviate the crunch on ore in Karnataka.
● In our view, significant uncertainties remain: 1) JSW’s expectation
of shipments starting in 7-10 days may be too optimistic by a few
weeks given challenges in setting up procedures and finding
transport; 2) the grade of ore available (furnaces need consistent
grades for efficient production), 3) potential demand for it (Figure
1), and 4) willingness of miners to sell (they can’t be forced to).
● With demand likely to be higher than supply, and the key
competitors for ore – the pellet plants – seeing US$175/t pellet
prices and a ~US$60/t conversion cost, eventual prices are likely
to be far higher than the US$72 seen by JSW so far.
● With JSW’s current procurement at only 30kt/day (equivalent to
60% utilisation), and a sharp rise in costs ahead, we still find the
stock expensive. Maintain our Underperform, with a TP of Rs550.
Court orders e-Auction of Karnataka ore inventory
On Friday, the Supreme Court gave an order allowing 1.5mnt/month
of iron ore e-auctions in Karnataka from the supposed 25mt of
inventory lying with miners. Mining is still banned. Key features of the
order:
● No middlemen/traders can participate. Only Karnataka-based
steel plants and pellet/beneficiation plants can buy for domestic
sales. There are a large number of pellet plants in this region.
● The base price for e-Auctions will be based on NMDC prices.
● MSTC would be the authorised agency for conducting the
auctions.
● The Central Empowered Committee overseeing the crackdown on
illegal mining in Karnataka has recommended that a 10% royalty
be applicable. Sale proceeds will not be shared with miners who
have been alleged to mine illegally. Also, 80% of sales proceeds
would be given to the miner, the rest retained by the government.
● No overstocking will be allowed by buyers
● Physical verification of the stock will be conducted before the e-
Auction. Further, the stock would be re-weighed at one checkpoint
on the transportation route.
Still too early to assess impact on JSW
As and when this inventory becomes available to steel producers, it
would help alleviate the crunch on ore in Karnataka. However,
significant uncertainties still remain:
● Implementation timelines: Setting up e-auction procedures for
all miners, finalising the maximum requirements for each buyer,
issuing permits, etc will take time. So will the setting up of checkposts
for surveillance of loading/transportation/overstocking. We
think JSW’s expectation of getting ore from e-Auctions in 7-10
days is at least a few weeks too optimistic.
● Pricing: The final outcome from the auctions is likely to be a
substantial rise in iron ore prices. We don’t think miners will be
forced to sell, and only a few would be under cash flow pressures:
demand-supply dynamics are therefore uncertain. While JSW is
by far the largest and lowest cost producer of steel in the region,
several pelletisation plants can compete for iron ore (Figure 1).
● Grade of inventory: The actual grades available are not clear,
and all Furnaces/Beneficiation plants/Pellet plants can only work
efficiently with a certain consistent grade of ore. JSW
management guides to two thirds of the inventory being fines for
which there would not be too much competition – we disagree,
given the pelletisation capacity in the region.
There seems to be enough leeway for prices to rise: with cost of
conversion of fines to pellets being ~US$60/t, and pellets selling at
US$175/t, there is enough leeway for prices to go up substantially
higher than the US$72/t at which JSW currently buys.
JSW is able to procure only 30kt/day, which implies only 60%
utilisation levels. We think low utilisation will continue for longer, and
prices through e-auctions will be much higher than current
procurement prices. The stock’s rally In the face of this uncertainty
looks unjustified. We maintain our estimates and Rs550 target price.
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