JSW Steel's capacity utilisation at 60% hits output growth

JSW Steel, one of the major steel producers in the country, has been facing problems over iron ore procurement. This is due to the mining ban in Karnataka, which caused the company to reduce its crude steel production levels to 60%, lower than the expectation of 80% as guided by the company for FY12 at the beginning of the fiscal year. After the ban, the company has reduced its production estimates for FY12 to 7.8 MT.

JSW Steel has been affected more strongly by the mining ban as compared to its peers. Despite several issues like low demand and the shortage of iron ore, the company has posted decent sales figures. The sales volume in the September 2011 quarter grew by 19%, which came as a surprise to the investors. When we spoke to the management, they said that the company has remained resilient in the tough periods. Can we witness similar strength in the coming quarters as well?

To understand this, we have been closely watching the company’s performance and events in the steel sector, which should give us some indication on the performance in the coming quarters.

The company has now released the production numbers for October 2011, which grew by 2% on a YoY basis to 5.70 lakh tonnes. The capacity utilisation continues to remain at 60% levels, which is a matter of concern especially keeping in mind the expected output of 70% desired by the company in the fiscal year. Considering the iron ore shortage in Karnataka, the question that arises is can JSW Steel achieve this target in a scenario where the demand has slowed down due to continuous hikes in the interest rate and slower investment plans.

Let us look at the production numbers, which will give us some estimates for the coming quarters. The total production in the last 7 months stood at 3.99 MT. This will have to be scaled to the level of 3.81 MT in the next 5 months to achieve the target production of 7.8 MT (70% capacity utilisation). We believe to achieve the desired production level, the company has to largely depend on 2 factors – iron ore availability and demand offtake in the country.

Despite opening the e-auction route for iron ore purchase, the problems have not ended here. Due to logistical constraints in the movement of iron ore, the auctioned ore has not been reaching the plants on time. This problem persisted in October 2011, and was stated by the company in the document filed with the BSE. On the other hand, demand has also slowed down in the current fiscal year. Both these factors remain major concerns in achieving the desired output. As per the JPC data, the demand has merely grown by 1.8% YTD. It does not look like this demand will improve significantly in the coming quarter, following a tighter lending situation that has delayed a lot of investment plans and projects in the country, impacting demand growth from the construction and infrastructure sector.

Looking at the October 2011 production numbers, which grew by only 2%, it seems that JSW Steel is still facing problems on iron ore procurement. If these issues continue in the near future, it will be a challenging task for the company to achieve the desired output.

With respect to the present scenario, however, the company has said that the demand has remained stable in India. Earlier, during the September 2011 quarter, the demand witnessed some impact because of temporary issues in the country. Further, the company has increased its steel prices by 3%-4%, and expects them to remain flat during the December 2011 quarter.