JSW Steel Crude Steel Production Spikes in Jan 2012

JSW Steel, which reduced its plant capacity utilisation to 30% in Sept 2011 due iron ore shortage, has shown quiet a comeback in the last three months (Oct 2011-Jan 2012). The company’s capacity utilisation went up to 84% in Dec 2011 and further up to 89% in Jan 2012. The production in the month of January stood at 0.806 mn tonnes.

At the beginning of the year, the company had estimated a total production of 8.75 MnT and 9 MnT in sales volume for FY12, which now has been reduced to 7.8 MnT and 7.5 MnT respectively (down by 14%) considering the iron ore shortage in Karnataka. In the last 10 months of the fiscal, the company has produced 6.158 MnT of steel, and to achieve the target of 7.8 MnT, it has to produce another 1.64 MnT in the next 2 months at the utilisation level of more than 90%.

We believe that the company has done well in the last 2 months on the back of timely availability of iron ore supply. If it continues to receive the supply at similar levels, it may achieve its annual target of 7.8 MnT for the fiscal year 2012.

Availability of iron ore was the only constraint for the company that restricted crude steel production at a higher capacity utilisation. However, with the smooth flow of iron ore from the allocated stock piles, JSW Steel has manage to overcome those issues in the immediate term. However, the question is how much iron ore stock will be available, and how long will it last?

As per the company’s statements, given in the quarterly meet the available iron ore for steel production will not last for more than 3 months, and it is hoping to get some relief by the Supreme Court lifting the ban in the Karnataka region. In the latest report submitted by the investigation committee, the CEC Central empowered committee has mentioned the issue of illegal mining and has suggested giving clearance to 45 mines to continue with their operations as soon as the Supreme Court lifts the ban. These include the mines of companies like NMDC, Minerals Enterprises Ltd., Mysore Minerals Ltd., etc. The lifting of ban on will help these steel companies to continue with the sustainable production.
 
However on the other side CEC has also recommended capping the iron ore production to 30 MTPA in the Karnataka region as compared to 45 MTPA produced in 2008-09 which remains a concern.

JSW Steel runs a 10 MTPA steel plant, and its total iron ore requirement is of about 18-20 MTPA. With the new capacity coming up, the requirement for iron ore will be more. Also, there are a large number of small sponge iron ore players in the region. So, the question that will be raised going forward is the allocation of the 30 MT of iron ore between these players which remains a concern if CEC recommendations of capping iron ore production is agreed by supreme Court.

We believe if the recommendations are accepted we can see supply shortage of Iron in the region that will impact the steel production also the iron ore prices will move in the upward direction. Getting iron ore on large quantities on sustainable basis is not possible due to other cost such as freight attached to it. Therefore we believe capping iron ore production will lead to higher cost and to some extent we can see a production cut.