The benefits of securing raw material may not be visible in the near term, but earnings may be revised up after FY12
The move is aimed at securing iron ore for its European subsidiary, Corus, which had earlier managed two-million-tonne-per-annum (mtpa) iron ore linkages from NML, but had no captive iron ore mines. The joint venture, commencing in 2012, will produce four million tonnes of dry iron ore products per year and will help insulate the company from the volatility in raw material prices.
Iron ore and coking coal have been major worries for steel players. As steel prices remained subdued due to demand concerns, higher raw material costs dented margins. The coking coal contract prices in the June quarter surged 56 per cent year-on-year to $200 a tonne, rising further to $225 during the September quarter. Iron ore prices nearly doubled in the period to $140-150 a tonne.
Corus contributes 23 million tonnes (mt) to Tata Steel’s total global capacity of 30 mtpa. With iron ore supplies commencing from Canada, along with two mt of coal supplies from Mozambique, profitability will improve and input costs will be controlled, reckon analysts. Moreover, Corus has also seen a turnaround in demand in Europe, especially from automobile and aviation sectors.
With this stake buy, though the earnings estimates may not change in the near term, FY12 estimates will definitely see an upward revision, say analysts. The markets gave a thumbs-up to the development, with the stock ending 1.1 per cent higher at Rs 603.40 the Bombay Stock Exchange on Wednesday.