MOIL to increase output to offset price decline

MOIL Ltd, India’s biggest manganese ore producer, sees a tight market for at least two to three years.

KJ Singh, chairman and managing director, told DNA that while the price of manganese ore has fallen by almost 43%,  eroding the company’s sales and profitability numbers, there are chances that the price may even go down further by another 6-7% before bottoming out.

There is a global demand of 35 million tonne for the ore while the production has been close to 47 million tonne. This has led to an oversupply situation in the global markets and a sharp downward correction in the price,” he said.

MOIL, which hit the capital markets with an IPO December last year, had seen a high of `591.05 on that day. But turbulent market conditions coupled with an outlook of a slower growth in the steel sector saw the company touching a new intraday low of `311.75 on Monday.

The steel sector is the biggest consumer of manganese ore and the growth of steel production and demand has a direct impact on the demand and prices of manganese ore. To produce a tonne of steel, 35 kilogramme of manganese ore is required.

Singh said last fiscal, steel production grew by 16% and 6%, globally and in India, respectively. In sharp contrast to this, manganese ore production grew by a whopping 33% world wide and 22% in India, causing a manganese ore glut with a serious impact on prices.

Besides, with only 2% import duty in India, several private players resorted to import of manganese ore at more or less the same price, and hence affecting MOIL’s profitability, he said.

“Our answer to the drop in prices is to keep on increasing our production to offset the impact on profitability. We have a plan to increase our production to 1.2 million tonne this year and then 1.5 million tonne by 2015-16,” Singh said, adding that the company is on track to reach the targeted production of 2.2 million tonne by 2020.

He said the company will maintain a production growth of 5-6% annually every year and will maintain its PAT ratio at 50% of the total turnover of the company. “We have undertaken several capacity expansion projects for this and we will make sure MOIL does not miss its targets,” Singh said.

Analysts are of the opinion that for MOIL direct expenses are going to be stable for the next couple of years. This will make operating margins a direct function of realisations for the company.

“With the international prices under pressure, we expect Ebidta (earnings before interest, depreciation, taxes and amortisation) margins of the company to remain in the range of 60% in FY12 as against 67% in FY11,” said Ankit Shah of brokerage SPA Financial Advisors, in a recently published report.

Singh said while tight market conditions will continue to dog the sector for at least two years, once the greenfield and brownfield steel projects start coming on-stream, the situation will improve once again. “By then, our greenfield projects with SAIL and RINL will also come on-stream and we will be adding a new business vertical to our portfolio, which will help the company post improved numbers,” he said.

MOIL, as part of its forward integration plans, is setting up two ferro alloy plants with a total capacity of close to 1,60,000 tonne per annum. While for one plant the company has tied up with SAIL and setting it up in Bhilai, and for the other it has tied up with RINL for a plant in Vizag. Both these plants are expected to come on-stream by CY 2013.