Threat to iron ore supply hits JSW Steel stock

JSW Steel has seen its market cap get sliced by close to a fourth in the space of a week following concerns about stoppage of iron ore supplies for its core steel operations and allegations in the Lokayukta report about irregularities in its procurement practices.

The Supreme Court's decision to ban mining in the Bellary-Hospet region stoked fears over the company's ability to sustain operations, given that at least 80 per cent of the company's iron ore requirement is met from mines in Karnataka.

A large portion of this is from mines within 20 km of the company's flagship 6.8 million tonnes per annum steel plant at Bellary. This plant represents about 90 per cent of the company's steel capacity.

With the ban on mining iron ore in close proximity to its plant, the fear among market participants is how much more the company may need to spend to procure iron ore from Orissa and Jharkhand to keep the blast furnaces running in Bellary. A prolonged ban on mining in Bellary region may push the company to look at mines outside Karnataka. Importing iron ore may prove much more expensive than sourcing it from mines that are closer.

The company's 2010-11 annual report indicates that the company spent an average of Rs 2,858 a tonne purchasing 12,972,111 tonnes of iron ore. This rate is roughly half the average spot price (through the same period) for medium-grade iron ore traded at Tianjin Port, China. Procuring iron ore from outside the State using railroads may add Rs 1,300-2,000 a tonne to the cost depending on where the company procures ore from. At 2010-11 levels, this could mean a 35-45 per cent increase in its iron ore bill, which is at Rs 3,700 crore a year.

For a company that eked out a consolidated net profit of just over Rs 1,700 crore last fiscal and is servicing debt of over Rs 16,474 crore, that is a huge chunk of change.

The company's requirement of iron ore is likely to witness a jump too (by at least 20-30 per cent) given that a 3.2-million-tonne blast furnace was recently added at Vijayanagar.

The company is also alleged, in by the Karnataka Lokayukta report, to have mined iron ore without requisite permits in addition to receiving volumes of iron ore in excess of the company's stated requirement. However, whether the company is really guilty of this will only be clear on further investigations.

Published on August 02, 2011

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