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m 30% mining tax announced on iron ore and coal mining: The proposed tax would be applicable at EBIT level after allowance for capital investment at long term bond rate and would also allow credit for state royalty (~7.5% of sales price). Corporate tax rate would be applicable after taking into account the mining tax calculation. The Australian government estimates an additional tax of ~US$11.2bn from mining tax over the next three years. We see net additional impact of 15-20% on total taxes paid on mining of coal and iron ore in Australia.
m Coking coal prices could see progressive upward movement: We see mining companies resorting to higher prices to recover higher cost of taxation and expect coking coal prices to start moving up again progressively. Our calculations on mining tax indicate that ~10% price hike can be profit neutral for the miners. Coking coal prices had seen sharp correction over the last 12 months correcting from US$330/tonne to US$210/tonne. We do not rule out coking coal prices above US$250/tonne in H2CY12E once the mining tax becomes law.
m Steel prices could also get support if raw material prices move upwards from here: We see the possibility of global steel prices getting support at current levels and even move higher if raw material prices of iron ore and coking coal gets pushed up due to higher prices from Australia. But we remain skeptical on this as steel prices would also be determined by global demand supply dynamics and China’s production run rate going forward and prices have remained weak in recent week due to higher supply.
m Profitability of domestic steelmakers is directly linked to global coking coal price: Domestic steel companies remain exposed to cost escalations on coking coal front as the backward integration remains low and imports are primarily from Australia. We have currently built in coking coal contract price assumptions of US$230/tonne and US$240/tonne in FY13E and FY14E for our coverage universe. We maintain our estimates as of now but acknowledge upward risk to our assumptions. We see EBITDA fall of between 9-13% on an increase of US$20/tonne in our coking coal cost assumptions.
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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Metals – Steel Sector
Mining tax in Australia could escalate costs yet again
The Australian senate has passed the resolution of 30% mining tax (Mineral resource rent tax-MRRT) on iron ore and coal which would become law from July 2012 and affect the profitability of all major miners including BHP Billiton and Rio Tinto. We see this development as a negative for the Indian steelmakers as we believe that coking coal prices (which had come down substantially during the last 6-9 months) would start moving upwards again and could escalate costs hurting profitability. We maintain our cautious stance on the sector and retain sell recommendation on Tata Steel and SAIL. We downgrade JSW steel to hold from buy.
m 30% mining tax announced on iron ore and coal mining: The proposed tax would be applicable at EBIT level after allowance for capital investment at long term bond rate and would also allow credit for state royalty (~7.5% of sales price). Corporate tax rate would be applicable after taking into account the mining tax calculation. The Australian government estimates an additional tax of ~US$11.2bn from mining tax over the next three years. We see net additional impact of 15-20% on total taxes paid on mining of coal and iron ore in Australia.
m Coking coal prices could see progressive upward movement: We see mining companies resorting to higher prices to recover higher cost of taxation and expect coking coal prices to start moving up again progressively. Our calculations on mining tax indicate that ~10% price hike can be profit neutral for the miners. Coking coal prices had seen sharp correction over the last 12 months correcting from US$330/tonne to US$210/tonne. We do not rule out coking coal prices above US$250/tonne in H2CY12E once the mining tax becomes law.
m Steel prices could also get support if raw material prices move upwards from here: We see the possibility of global steel prices getting support at current levels and even move higher if raw material prices of iron ore and coking coal gets pushed up due to higher prices from Australia. But we remain skeptical on this as steel prices would also be determined by global demand supply dynamics and China’s production run rate going forward and prices have remained weak in recent week due to higher supply.
m Profitability of domestic steelmakers is directly linked to global coking coal price: Domestic steel companies remain exposed to cost escalations on coking coal front as the backward integration remains low and imports are primarily from Australia. We have currently built in coking coal contract price assumptions of US$230/tonne and US$240/tonne in FY13E and FY14E for our coverage universe. We maintain our estimates as of now but acknowledge upward risk to our assumptions. We see EBITDA fall of between 9-13% on an increase of US$20/tonne in our coking coal cost assumptions.
m Maintain cautious stance: We do not change our estimates and target prices downwards as of now but maintain our cautious stance on the sector with concerns remaining on domestic demand growth, steel price sustenance in global markets and rising raw material costs on coking coal post mining tax in Australia. Maintain sell on Tata Steel and SAIL. Downgrade JSW steel to hold from buy.
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