Mining Ban In Karnataka Impacts JSW Steel’s Production For March 2012

JSW Steel, the third-largest Steel producing company in India, has released its production numbers for March 2012. The company has been facing problems over iron ore procurement due to the mining ban ordered by the Supreme Court since August 2011. However, the Supreme Court did provide temporary relief to steel producers by asking the NMDC to supply 1 million tonne of iron ore. It also allowed the steel companies to take iron ore from the domestic inventory of 25 million tonnes. However, the situation worsened in February and March when the inventory was on the verge of extinction and the quality of iron started to deteriorate.

The company’s crude steel production for March has grown by 26 per cent on a YoY basis to 0.65 million tonnes. Its capacity utilisation during the month stood at 65 per cent which was lower as compared to 85 per cent in January 2012. The dip in production was mainly due to the lower grade of iron ore which led to a decrease in volumes in February and March.

The decline in production will reflect an impact on the company’s revenue growth for the March quarter. However, due to an increase in the steel prices the company will be able to offset some of the losses from the lower volume side. In 2011 the company had provided a guidance of 8.75 million tonnes of crude steel production for the full year FY12. However, after the mining ban and in view of the scarcity of iron ore, the company revised its production to 7.8 million tonnes. But, as mentioned in our earlier updates, the actual steel production has been only 85 per cent of the company’s revised target. The production for the fiscal year grew by just 16 per cent on a YoY basis mainly on account of capacity expansion.

In a most recent development, the Supreme Court has green-lit mining of more than 50 hectares in Karnataka after their environmental plans are approved and with certain conditions in place, including a reclamation and rehabilitation (R&R) plan. The final judgment on the issue is yet to be delivered. This means that the individual owners of the mines have to file an R&R plan which will take some more time and delay in resuming mining operations in the region. The decision has come at a time when the steel and iron producing companies were feeling the heat due to shortage of iron ore in the region

In conclusion we believe that the company for the March quarter will report modest growth due to lower production during the quarter although it will be able to offset some of its lower volume growth with the hike in steel prices. The decision of the Supreme Court to allow partial mining will no doubt help the company to increase its capacity utilisation and this will reflect on its financials in FY13.