JSW Steel, one of the most aggressive domestic steel players in the country till a few months back, may face a rough ride for the next couple of quarters.
The company, which recently touched a nameplate production capacity of 14.3 million tonne per annum (mtpa) toppling SAIL as the biggest steel manufacturer, is likely to see a drop in production volumes and increase in costs due to a ban on mining iron ore from the Karnataka region.
Last month the Supreme Court imposed an interim blanket ban on all iron ore mining activities in Karnataka, citing excessive damage to the environment. While the move was hailed by experts, almost all the steel players including JSW that were dependent on ore from Karnataka saw massive production cuts.
Analysts said despite its claims of maintaining over 8 mt of production for the current year, JSW will likely see much less. Besides, transportation costs will also increase as now it will have to ship iron ore from adjoining states.
“Their volumes are sure to contract beyond 8.7 mtpa that the company has claimed and I believe there will be a slippage of over 20% in volumes over the company’s claims,’’ said Bikash Bhalotia, metals analyst with brokerage Pinc Research.
JSW, whose iron ore requirements are close to 10 mtpa, was 100% dependent on Karnataka, out of which 70% came from Bellary, he said, adding, with the ban, it will not be sufficient for JSW to meet its requirements.
“Even when the situation improves, it will not come back to the same level when the company posted $180 per tonne of Ebidta. I believe, the company will post an Ebidta of $160 per tonne if the situation improves,” Bhalotia said.
Also, not only production volumes, but the company may also see erosion of margins due to rise in transportation costs.
A recent report by HSBC said that JSW sources 65% iron ore from spot market, which, if replaced by ore from Orissa could increase transportation costs by $20-25 per tonne.
An analyst from an international brokerage said input costs could rise by Rs1,200 per tonne if the ore is transported from Chhattisgarh, which the company is currently mulling.
On August 5, after the Supreme Court allowed NMDC to mine 12 mtpa of iron ore from Karnataka, JSW Steel said, “The total availability of iron ore in Karnataka will be only 19- 20 mt, including the proposed 12 mt from NMDC in Bellary against the industry requirement of 33 mt, thus meeting only 60% of requirement.”
For JSW, the iron ore requirement to run at full capacity is 18 mtpa, but considering the fall in availability, the company plans to run its plant at 80% utilisation levels. But analysts say even that is going to be difficult.
Comments