Brokerages say the latest price hike is sustainable on improved demand and particularly favourable for the world’s seventh-largest steel producer which has captive raw material supplies
The future is looking pretty exciting for Indian steelmakers, according to brokerages.
In a report on Tata Steel released recently, Motilal Oswal Securities (MOSL) says, "Steel prices have recovered by 10-15% across the world over the past one month due to end of de-stocking, supply correction, and raw material cost pressures. HRC (hot-rolled coil steel) prices have risen to $670 per tonne. Demand is likely to pick up over the next couple of months, as buyers return to the market post winter vacations in the western world. A strong steel price scenario is expected for 4-5 months."
In the past few days, Indian steel producers JSW Steel, Essar Steel and Steel Authority of India have announced a 3-5% hike in prices. Kotak said in a report on 3rd January, "Unlike earlier price revision, this appears to be sustainable, noting (1) the cost-push driven increase in steel prices globally over the past few weeks, (2) likely seasonal improvement in demand and restocking, and (3) alignment of domestic steel prices with landed costs of imports. We expect companies with captive raw materials to benefit; Tata Steel will be the biggest beneficiary, in our view."
MOSL agrees that the future for Tata Steel looks particularly exciting. The steelmaker, which has a presence in Europe, Thailand and Singapore, is set to expand its capacity at Jamshedpur from 6.8 million tonnes per annum (mtpa) to 10 mtpa, to start coking coal production at its Benga project in Mozambique and iron ore production at its newly-acquired direct shipping ore (DSO) project in Canada. The brokerage says that a "$100 per tonne increase in steel prices tends to expand the margins of Indian operations by $50 per tonne, thereby driving the equity value by $425 million".
In November 2009, Tata Steel paid $88.2 million to Sydney-based Riversdale Mining to jointly mine coking coal from Benga in Mozambique, to feed its Corus steel-making facilities in the UK and Europe. According to the company, the Benga project has coal reserves of 502 million tonnes. Tata Steel owns 35% stake in Benga with the right to buy 40% of the produce and this will remain even if it sells its 24% stake in Riversdale, on the A$3.9 billion takeover offer by Rio Tinto for the Australian mining company.
In a report late December, independent brokerage CLSA had said, "Recent commentary by Tata Steel's management indicates that the company has not yet decided on making a counter-bid for Riversdale. We consider a counter-bid by Tata Steel as unlikely, as it would reverse the focused balance sheet de-leveraging process currently underway. Acceptance of Rio Tinto's offer for Riversdale has a higher likelihood, but would require Tata Steel getting comfort from Rio Tinto on coking coal supplies."
MOSL says, "Though the coal production is expected to be small at about one million tonnes (on attributable basis from Benga) in FY13 and logistic bottlenecks remain in evacuating large quantity of coal from Mozambique, the keen interest of Rio Tinto group with a firm bid of A$3.9 billion for Riversdale, and a possible counter bid, is likely to get reflected in valuations of Tata Steel sooner than expected."
In September 2010, Tata Steel acquired an 80% stake in the direct shipping ore (DSO) project in Canada's New Millennium Capital Corp (NML). The DSO project has 64 million tonnes of proven and probable mineral reserves. As part of the agreement, Tata Steel will reimburse NML 80% of the cost to date on the project, arrange funding up to CDN$300 million for capital costs and commit to take 100% of the DSO project's iron ore products, of specified quality, at world market prices for the life of the mining operation. The joint venture is expected to produce four million dry tonnes per year of iron ore products.
The Tata Steel stock price was up by over 1% today, after New Millennium said it received environmental approval for its iron ore project with the Indian steelmaker and the joint venture partners expect to begin production by the second quarter of 2012.
According to MOSL, "The Jamshedpur expansion to 10mtpa would be completed by December 2011 and coking coal and iron ore production would start in 2HCY11." The sale of Teesside Cast Products steel plant in northern England for nearly $500 million will help deleverage its balance sheet and reduce earnings volatility for its Europe operations, MOSL says.
The brokerage also points out that over FY10-11 Tata Steel has sold around Rs12 billion worth investments in group companies such as TCS, Tata Power and Tata Motor and it is likely to further unlock value of investments worth about $900 million over the next 2-3 years.
MOSL points out that while steel volume sales and realisations are expected to improve over the next two years, "declining coking coal integration on account of lack of growth at coal mines and appreciation of Indian currency (Rs43 a dollar for FY13) will drag margins".
Capacity utilisation at Tata Steel Europe (formerly Corus) has improved dramatically since FY09, mainly because it reduced purchases of third-party steel. It has undertaken various cost-cutting measures, including rationalisation of staff. Tata Steel margins recovered in 1HFY11 but a subsequent steel price correction and raw material cost inflation weighed in the second half. But with a recovery in steel prices, margins are expected to be higher in FY12. — Munira Dongre
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