An expected upturn in domestic iron ore supply, which may result in falling prices, is likely to be a negative for several domestic steel companies having captive mines even as they continue to face intense competitive pressures globally thanks to a sharp fall in global ore prices, according to a research report by Prabhudas Lilladher.
Domestic iron ore prices had been increasing steadily of late following a spate of bad news to have hit the mining sector in the form of a Supreme Court ban on illegal mining in Odisha in May as well as the Jharkhand government’s recent decision to order a shutdown of several mines.
The two mineral-rich states constitute a bulk of iron ore supplies in the country.
In fact, on account of rising domestic prices and weak international prices, the difference between the domestic and imported ore – where there historically used to be about a 40 percent discount – has become negligible.
However, a recent court order provided a relaxation by ordering liquidation of piled-up inventory at a non-operational mine in Odisha.
Analysts at Prabhudas Lilladher believe this may be extended to other mines as well, leading to a sharp increase in supply and a fall in domestic iron ore prices.
“Liquidation of stocks would be a key factor in sustaining of domestic prices. If the earlier judgment of SC in case of Karnataka and Goa is to go by, we expect stock liquidation of iron ore at a large scale given the severe dearth of iron ore in the country. This could be a big dampener for domestic prices,” analysts at the firm wrote.
Who wins, who loses
According to the brokerage, JSW Steel was impacted the most from rising domestic prices. “But, given the weak outlook on domestic prices, we expect JSW Steel to benefit Q4FY14 onwards.”
On the contrary, margins of Tata Steel (domestic operations), SAIL and Jindal Steel & Power , which have captive iron ore would be under pressure due to dilution in mining margins, according to analysts.
“We maintain our underweight rating on the steel sector given the expensive valuations and depleting advantage of cheap domestic iron ore,” they said.
JSW Steel stock price
On September 24, 2014, at 10:12 hrs JSW Steel was quoting at Rs 1196.90, down Rs 9.95, or 0.82 percent. The 52-week high of the share was Rs 1365.35 and the 52-week low was Rs 707.50. The company's trailing 12-month (TTM) EPS was at Rs 97.49 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 12.28. The latest book value of the company is Rs 970.48 per share. At current value, the price-to-book value of the company is 1.23.
Source: moneycontrol
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