Captive mines, core sector demand give steel stocks a high

Captive mines, core sector demand give steel stocks a high

Steel has been one of the best performing commodities in the past year, with up to 10 major stocks gaining more than 100% in prices, compared with the 39% growth of the benchmark index, the Sensex.

Analysts predict that major steel stocks could continue their rally in the future, riding on the back of the building and infrastructure boom. Even as iron ore prices have shot up, some companies have remained unscathed because they source their own ore. The appreciating rupee also has helped balance out rising ore prices.

One advantage for large Indian steel companies, such as Tata Steel Ltd and the government-run Steel Authority of India Ltd (SAIL), is that they boast their own, or captive, mines, which insulates them from the high prices of iron ore, the main ingredient in making steel.

The current spot price of iron ore is in the range of $120 (about Rs4,788) to $150 per tonne, depending on where it is sourced from. The price of steel is about Rs32,000 per tonne—under $800. Typically, 1.6 tonnes of iron ore is required to produce a tonne of steel.

Tata Steel and SAIL enjoy cost advantage compared with peers, who buy iron ore from the spot market. The cost of extracting iron ore from captive mines to produce a tonne of steel is about $9-10. As a result, the profitability of these companies remains very high.

Other large Indian steel companies, such as JSW Steel Ltd, although not fully integrated, also meet a large part of raw material requirements from captive mines.

Tata Steel’s stock price has gone up 100% in the past one year, while that of SAIL and JSW Steel has increased about 200% during this period.

Adrian Mowat, regional equity strategist at JPMorgan Securities (Asia Pacific) Ltd, recently predicted strong future growth for the domestic steel sector as infrastructure spending goes up, along with the cost of raw materials.

Rising global demand for steel also makes the sector very attractive, according to Mowat. By one estimate, India will require 200 million tonnes (mt) of steel annually by 2020. In comparison, India currently makes 50mt and most major steelmakers are planning expansions. For example, Tata Steel, India’s largest integrated player, now has a 5mt manufacturing capacity, not counting the capacity of Corus, the British firm it acquired early this year.

On Tuesday, the Bombay Stock Exchange’s Metal index was down 180.49 points, or 1.03%,and?closed at?17,344.05.