Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
METALS & MINING
Steel
n Global steel capacity utilization levels during Q3 stood at sub 80% levels. Slowing
global economic growth would imply continuance of the trend in near term
and any significant improvement in steel prices is unlikely despite strong seasonality
in Q4FY12.
n Slowdown in awarding of infra projects,high interest rates and falling capex has
badly hurt Indian steel demand to <3% Y/Y growth levels in FY12 vs. >10%
CAGR for last couple of years. However, domestic steel prices have been reasonably
stable due to fall in supply from Karnataka region which accounts for over
20% of Indian steel production. Global steel prices did correct > 10% in Q3 but
the rupee depriciation of 11% during Q3, has prevented much of the pressure
from imported steel.
n Essar Steel has just ramped up its production capacity by 6mt to 10mt at Hazira.
Further, 3mt of Tata Steel capacity commissioning is likely in Q4FY12 while few
other steel companies are closer to commissioning which is likely to lead to glut
of domestic supply in FY13e and put pressure on domestic steel prices in FY13e.
Raw materials/ Mining
n China's total crude steel output likely rose 9.2% in 2011 to 683mt as per estimates
from CISA. Import prices for iron ore averaged $166.2/t in the first 11
months of CY11, up 31.5% Y/Y. However, turbulence was seen in Q3, with iron
ore prices crashing by 30% in Oct 11 before recovering by 10% and sustaining at
those levels since Nov 11. Presently 62% Fe grade iron ore export prices to
China are trading at ~139$/t CIF and 58% Fe grade prices are trading at $125/
t CIF. Average iron ore prices were down 20% Q/Q during Q3.
n Quarterly contract prices for hard coking coal saw a downward trend throughout
FY12. Starting Q1 at US$ 330/t FOB, Q2 was marginally lower (4.5% Q/Q) to
US$ 315/t FOB, Q3 fall accelerated to 9.5% Q/Q to US$ 285/t FOB. Now Q4
contracts have been settled at US$235/tonne FOB Australia sharply down by
16.1% Q/Q. However, INR has depreciated vs US$ by 11% during 3QFY2012,
which will limit the benefit of lower coking coal prices for domestic steel companies.
The leftover lower cost benefit would flow into P&L of steel companies with
a quarter lag as always.
n Shift from UHV to GCV coal pricing by Coal India will raise cost for captive
power and sponge iron production by Rs.100-200/t for E and F grade per ton of
linkage coal. This will increase the cost of production of aluminum by US$ 30-50/
t and of sponge iron by US$4-6/ton. Though the shift was announced from 1 Jan
2012, there are indications that price increases might be deffered for time being.
Base metals
n Average LME aluminium prices for Q3 were sharply down 12.7%Q/Q and
10.6%Y/Y. Average aluminium inventory at LME was up 7.9%Y/Y and up 2.2%
Q/Q.
n Average LME copper prices for Q3 were sharply down by 15.8%Q/Q and
12.7%Y/Y. Average copper inventory at LME was up 13.2%Y/Y but fallen
sharply by 11.2% Q/Q.which is the only silver lining.
n Average LME zinc prices for Q3 were sharply down by 15%Q/Q and 17.9%Y/Y.
Average zinc inventory at LME are up 21.8%Y/Y but again like copper down
sharply by 9.8% Q/Q.
n As base metal price correction was severe only towards end of Q2, earning impact
would be felt primarily in Q3 results. But US$ appreciation of over 10% vs.
INR would protect the fall in earnings to some extent. Cost pressure from higher
coal prices are irreversible barring seasonality additional impact in Q2. Operating
margin contraction would be glaring on Y/Y comparison in Q3.
Regulatory
n The Supreme Court had deferred the hearing on the Karnataka mining ban until
20 Jan 2012. Still it's unknown whether mining would be permitted even on Jan
20 or not and who all get the approval to restart mining. Both iron ore miners
and steel makers are very adversely affected due to the ongoing ban in Q3.
n New mining bill has been tabled in parliament during winter session in Dec 11.
The bill makes it mandatory for coal miners to share 26% of their profits and
also proposes that companies mining other minerals (such as limestone, iron ore,
copper and bauxite) should pay an amount equivalent to 100% of the royalty on
their production to the local population of the project site. Since the discussion
on the bill is still to begin in parliament it seems it's unlikely that it would become
a low before H2CY12.
n Potential export/ mining curbs in Goa, due to the ongoing illegal mining enquiry,
remain key concern as the submission of the Shah Commission report was deferred
to Jan 2012(Dec 1st earlier). As Goa state elections are due in next 2
months, uncertainty as to when the report would be tabled remains.
n The Indian government has increased the export tax on iron ore from 20% to
30% on 30 December 2011. While, this would further hurt iron ore exporters in
their peak season of Jan - April, the benefit to steel companies would be lower
than anticipated.
Sesa Goa
n Sesa Goa acquired further 1.5% stake in Cairn India and now has 20% stake in
Cairn India and would contribute to profit from associates' line item going forward
as Vedanta group has taken controlling stake (58.5%) in Cairn India.
n Sesa Goa's iron ore mining operations have been hit in Karnataka post ban imposed
by Supreme Court since Aug 2011. It had about 0.8mt of iron ore inventory
at Karnataka at beginning of Q3, majority of which is likely to be sold off
through e-auctions in domestic markets during Q3 at a prices which are little
lower than Q2.
n Sesa Goa iron ore sales volume for Q3 is likely to fall 17% Y/Y to 4.5wmt as Goa
operations are impacted due to investigations conducted by Shah Commission,
lower output from erstwhile Dempo mines and continued ban of mining in
Karnataka during Q3. Iron ore exports from Goa's Mormugao Port totaled
3.19mt in Nov down 6%Y/Y compared to 25%Y/Y correction in October 2011. In
the first eight months of FY12, iron ore exports from Mormugao Port totaled 17.9
mt down 13.9% Y/Y.
n Average spot iron ore prices declined 20% Q/Q in US$ but the rupee has also
declined 11% vs. US$ by end of Q3 which would cushion the fall in realization in
rupee terms. We expect Sesa Goa's iron ore price realizations to have fallen 5%
Q/Q in rupee terms during Q3.
n Sesa Goa is expected to report Q3 revenue of Rs.17.04bn down 23.8% Y/Y,
EBITDA of Rs.6.93bn down 43.7% Y/Y and PAT of Rs.2.816bn down 73.6% Y/Y.
EBITDA margins are likely to contract by 1420bps Y/Y due to fall in realizations,
rise in logistics cost, lower sales volume and increase in export duty. Impact is
seen higher on PAT level due to sharp fall in other income, higher interest
charges, heavy forex loss estimated at Rs.2.1bn for Q3 and increase in tax rate.
We expect Q3 EPS of Rs. 3.24 vs. Rs.12.39 Y/Y. Please note that we have not
included profit of associates' contribution from Cairn India in our earnings estimate
for Q3.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
METALS & MINING
Steel
n Global steel capacity utilization levels during Q3 stood at sub 80% levels. Slowing
global economic growth would imply continuance of the trend in near term
and any significant improvement in steel prices is unlikely despite strong seasonality
in Q4FY12.
n Slowdown in awarding of infra projects,high interest rates and falling capex has
badly hurt Indian steel demand to <3% Y/Y growth levels in FY12 vs. >10%
CAGR for last couple of years. However, domestic steel prices have been reasonably
stable due to fall in supply from Karnataka region which accounts for over
20% of Indian steel production. Global steel prices did correct > 10% in Q3 but
the rupee depriciation of 11% during Q3, has prevented much of the pressure
from imported steel.
n Essar Steel has just ramped up its production capacity by 6mt to 10mt at Hazira.
Further, 3mt of Tata Steel capacity commissioning is likely in Q4FY12 while few
other steel companies are closer to commissioning which is likely to lead to glut
of domestic supply in FY13e and put pressure on domestic steel prices in FY13e.
Raw materials/ Mining
n China's total crude steel output likely rose 9.2% in 2011 to 683mt as per estimates
from CISA. Import prices for iron ore averaged $166.2/t in the first 11
months of CY11, up 31.5% Y/Y. However, turbulence was seen in Q3, with iron
ore prices crashing by 30% in Oct 11 before recovering by 10% and sustaining at
those levels since Nov 11. Presently 62% Fe grade iron ore export prices to
China are trading at ~139$/t CIF and 58% Fe grade prices are trading at $125/
t CIF. Average iron ore prices were down 20% Q/Q during Q3.
n Quarterly contract prices for hard coking coal saw a downward trend throughout
FY12. Starting Q1 at US$ 330/t FOB, Q2 was marginally lower (4.5% Q/Q) to
US$ 315/t FOB, Q3 fall accelerated to 9.5% Q/Q to US$ 285/t FOB. Now Q4
contracts have been settled at US$235/tonne FOB Australia sharply down by
16.1% Q/Q. However, INR has depreciated vs US$ by 11% during 3QFY2012,
which will limit the benefit of lower coking coal prices for domestic steel companies.
The leftover lower cost benefit would flow into P&L of steel companies with
a quarter lag as always.
n Shift from UHV to GCV coal pricing by Coal India will raise cost for captive
power and sponge iron production by Rs.100-200/t for E and F grade per ton of
linkage coal. This will increase the cost of production of aluminum by US$ 30-50/
t and of sponge iron by US$4-6/ton. Though the shift was announced from 1 Jan
2012, there are indications that price increases might be deffered for time being.
Base metals
n Average LME aluminium prices for Q3 were sharply down 12.7%Q/Q and
10.6%Y/Y. Average aluminium inventory at LME was up 7.9%Y/Y and up 2.2%
Q/Q.
n Average LME copper prices for Q3 were sharply down by 15.8%Q/Q and
12.7%Y/Y. Average copper inventory at LME was up 13.2%Y/Y but fallen
sharply by 11.2% Q/Q.which is the only silver lining.
n Average LME zinc prices for Q3 were sharply down by 15%Q/Q and 17.9%Y/Y.
Average zinc inventory at LME are up 21.8%Y/Y but again like copper down
sharply by 9.8% Q/Q.
n As base metal price correction was severe only towards end of Q2, earning impact
would be felt primarily in Q3 results. But US$ appreciation of over 10% vs.
INR would protect the fall in earnings to some extent. Cost pressure from higher
coal prices are irreversible barring seasonality additional impact in Q2. Operating
margin contraction would be glaring on Y/Y comparison in Q3.
Regulatory
n The Supreme Court had deferred the hearing on the Karnataka mining ban until
20 Jan 2012. Still it's unknown whether mining would be permitted even on Jan
20 or not and who all get the approval to restart mining. Both iron ore miners
and steel makers are very adversely affected due to the ongoing ban in Q3.
n New mining bill has been tabled in parliament during winter session in Dec 11.
The bill makes it mandatory for coal miners to share 26% of their profits and
also proposes that companies mining other minerals (such as limestone, iron ore,
copper and bauxite) should pay an amount equivalent to 100% of the royalty on
their production to the local population of the project site. Since the discussion
on the bill is still to begin in parliament it seems it's unlikely that it would become
a low before H2CY12.
n Potential export/ mining curbs in Goa, due to the ongoing illegal mining enquiry,
remain key concern as the submission of the Shah Commission report was deferred
to Jan 2012(Dec 1st earlier). As Goa state elections are due in next 2
months, uncertainty as to when the report would be tabled remains.
n The Indian government has increased the export tax on iron ore from 20% to
30% on 30 December 2011. While, this would further hurt iron ore exporters in
their peak season of Jan - April, the benefit to steel companies would be lower
than anticipated.
Sesa Goa
n Sesa Goa acquired further 1.5% stake in Cairn India and now has 20% stake in
Cairn India and would contribute to profit from associates' line item going forward
as Vedanta group has taken controlling stake (58.5%) in Cairn India.
n Sesa Goa's iron ore mining operations have been hit in Karnataka post ban imposed
by Supreme Court since Aug 2011. It had about 0.8mt of iron ore inventory
at Karnataka at beginning of Q3, majority of which is likely to be sold off
through e-auctions in domestic markets during Q3 at a prices which are little
lower than Q2.
n Sesa Goa iron ore sales volume for Q3 is likely to fall 17% Y/Y to 4.5wmt as Goa
operations are impacted due to investigations conducted by Shah Commission,
lower output from erstwhile Dempo mines and continued ban of mining in
Karnataka during Q3. Iron ore exports from Goa's Mormugao Port totaled
3.19mt in Nov down 6%Y/Y compared to 25%Y/Y correction in October 2011. In
the first eight months of FY12, iron ore exports from Mormugao Port totaled 17.9
mt down 13.9% Y/Y.
n Average spot iron ore prices declined 20% Q/Q in US$ but the rupee has also
declined 11% vs. US$ by end of Q3 which would cushion the fall in realization in
rupee terms. We expect Sesa Goa's iron ore price realizations to have fallen 5%
Q/Q in rupee terms during Q3.
n Sesa Goa is expected to report Q3 revenue of Rs.17.04bn down 23.8% Y/Y,
EBITDA of Rs.6.93bn down 43.7% Y/Y and PAT of Rs.2.816bn down 73.6% Y/Y.
EBITDA margins are likely to contract by 1420bps Y/Y due to fall in realizations,
rise in logistics cost, lower sales volume and increase in export duty. Impact is
seen higher on PAT level due to sharp fall in other income, higher interest
charges, heavy forex loss estimated at Rs.2.1bn for Q3 and increase in tax rate.
We expect Q3 EPS of Rs. 3.24 vs. Rs.12.39 Y/Y. Please note that we have not
included profit of associates' contribution from Cairn India in our earnings estimate
for Q3.
No comments:
Post a Comment