JSW Steel's move to import high-grade ore this fiscal not-all-that negative: Analysts

Company has imported its first shipment of 170,000 tonne high grade iron ore last week from South Africa

JSW Steel, India's third largest steel producer by capacity, today said it has decided to import six million tonne of iron ore in 2014-15 (Apr-Mar) due to shortage of the mineral ore in the domestic market.

"This is an irony that India has to import iron ore inspite of having large iron ore resources," the company said in a release today.

JSW Steel has imported its first shipment of 170,000 tonne high grade iron ore last week from South Africa at Krishnapatnam Port and is planning to bring in three more capesize vessels in next few days.

As the company has no captive source of iron ore mines in the domestic market, it relies heavily on low-grade iron ore available in Karnataka and Goa.

"The recent closure of mines in Odisha, delay in opening up of mines in Karnataka and Goa has resulted in acute shortage of iron ore in the country," the release quoted joint managing director and group chief financial officer Seshagiri Rao as saying.

"We have decided to import half a million tonne of high-grade ore every month to maintain the capacity utilisation at optimum level," Rao added.

Analysts, however, were of the view that imports of high grade iron ore, though will take up JSW Steel's cost for per tonne of steel, the impact is not expected to be significantly high.

"What has to be kept in mind is that the company is importing high grade iron ore and not the usual low grade ore which it picks up from the domestic market," said Giriraj Daga, senior analyst with Nirmal Bang. "Due to the grade difference, quantity of iron ore to be used will be lower, which means to make one million tonne steel, the company will need to use 1.6 million tonne of high grade iron ore from the 2.2 million tonne it did when it used the low grade," he said. "So, even if imports work out to be costlier, the quantity consumed will come down," Daga added.

Also, usage of high grade ore will help the company save on fuel cost since high grade ore has better fuel efficiency than the low grade.

"So, net-net, the impact on cost per tonne of steel will not be very high for the company even if it goes up," Daga explained.

Currently, JSW Steel is buying the domestically available low-grade iron ore at about Rs 3,800 per tonne, while imported iron ore will cost about Rs 6,500-7,000 per tonne.

"With the improved iron ore grade, the plant's capacity utilisation is also likely to go up and infact this works in favour of the company as it can then cover its fixed costs," said Chirag Shah, director at Barclays Securities.

The surging iron ore prices due to shortages in India is matter of grave concern when international iron ore prices dropped by more than 30 percent in the last 12 months, the company said in its release.

The capacity utilisation in the domestic steel industry has dropped to 77 percent in 2013-14 (Apr-Mar) from 88 percent in 2010-11, said the Mumbai-based steel producer.

"By securing 6 million tonne high grade iron ore for this year, the company has kind of secured its raw material to some extent for the year," said Shah of Barclays.

It is difficult to give figures as to how much would be the impact on the company's costs, but since there are quite a few positives to importing ore, the overall impact is not expected to be very negative for the company, analysts said.