JSW Steel: ‘Not out of the woods as yet’

CMP Rs710, Target Rs712, Upside 0.3%

Supply to remain tight in the near term

The CEC has classified 166 mining leases in Karnataka into three broad categories (A, B & C). Category ‘A’ mines wherein illegal activities are absent/negligible can be restarted, but only after the prescribed reclamation and rehabilitation (R&R) procedure and environmental clearance is received. The average output from category ‘A’ mines over the last 3 years is ~11mn tons. We believe the mines under Category ‘A’ would take around 2-4 months to restart. This coupled with the current production of 6-7mn tons from NMDC would be quite lower than the demand from steel producers. In addition, CEC has recommended a ceiling of 25mn tons from all the mining leases in Bellary and 5mn tons from Chitradurga and Tumkur together. As a result, we expect supplies to remain tight in the near term.

CEC recommendation to push iron ore costs higher for JSW

The CEC report recommends the sale of the iron ore should continue through e-auction only. However, the quantity to be put up for e-auction, its grade, lot size, its base/floor price and the period of delivery will be decided/provided by the respective lease holders. Exports would be permissible for material which steel plants are unwilling to purchase on or above the average price realized for the corresponding grades during the sale of ~25mn tons of existing iron ore stock. This coupled with the production cap of 30mtpa, delay in clearance of the mines according to the new R&R norms and rising demand from the nearing state would lead to higher ore prices.

FY13E volumes to remain below JSW’s guidance

JSW’s production jumped to 0.8mn tons in January on the back of higher iron ore supply from e-auction. However, it declined to 0.6mn tons (65% utilization) in February due to faster depletion of iron ore stockpiles. The company currently has ~1-1.5months of iron ore inventory to run at the rate of ~60%. In addition to this, the iron inventory in the state at the end of February was a meagre 4.4mn tons against the demand of 2.5mn tons every month. We believe, production would remain at the current levels for Q1 FY13 as the current inventory, both with the company and the state is depleting fast and the restart of the Category ‘A’ mines would take some time. We expect saleable steel production of 8.2mn tons in FY13, against the management guidance of 9.5mn tons. We maintain our Market Performer rating on the stock with a revised 9-month price target of Rs712.