Steel stocks gain as govt allows SAIL to sell iron ore from captive mines

Topics steel stocks | SAIL | Buzzing stocks

Shares of steel companies such as SAIL, Tata Steel, Jindal Steel and JSW Steel rallied nearly up to 4 per cent in the intra-day deals on Wednesday after the government allowed state-run Steel Authority of India (SAIL) to sell 25 per cent of its iron ore produced from captive mines.

In a separate announcement, the government also allowed the company to dispose of the old stock of 70 million onnes (MT) of low grade iron fines and ores (including slime), lying dumped across different captive mines of SAIL. 

The ministry of steel has stated that more than 162 MT of low-grade iron ore are available at mine heads in India, as the regulations do not permit SAIL to sell these materials to domestic end-use companies.

The move by the ministry through two separate notifications on September 16 is seen as an effort to reduce concerns regarding the expiry of mines. Thirty-one working mines of iron ore are expiring on March 2020. SAIL has the capacity to enhance iron ore production from its captive mines by around 8 MT in 2019-20 and 12 mt by 2021-22. READ MORE

“Ensuring raw material security for Indian steel industry has been at the top of our agenda. Our Government has taken several efforts towards this and the orders passed by the Ministry of Mines is an important step in this direction," Minister of Petroleum and Natural Gas and Steel Shri Dharmendra Pradhan said. 

At 01:35 pm, Tata Steel was trading 3.54 per cent higher at Rs 357.15 apiece while JSW Steel was trading nearly 3 per cent higher at Rs 222.05. Jindal Steel & Power was quoting 3 per cent higher at Rs 105.85 and SAIL was ruling at Rs 33.55 apiece on the NSE. In comparison, the benchmark Nifty50 index was ruling at 10,839.75 level, up 22 points or 0.20 per cent. 

"In our view, the government’s decision brings to the fore the larger issue of potential delays in scheduled bidding process in the domestic iron ore market. If the bidding process is delayed, we estimate a shortfall of at least 30–35mtpa even if SAIL manages to ramp up production. We also expect the decision on Donimalai mine (NMDC) shortly; this would add about 7mtpa of supply, potentially ameliorating the shortfall further," wrote Amit A Dixit and Meera Midha of Edelweiss in a recent report.

Adding: "The latest development spells relief for the stock in the near-term considering potential benefits from merchant iron ore sales. However, in medium-to-longer term, we remain circumspect about the actual gains accruing to the company. Maintain ‘REDUCE/SU’ with a TP of INR33. The stock is trading at 5.8x FY21E EBITDA."

Other metal stocks, too, gained in the trade. While NMDC rose over 4 per cent, Vedanta, Welspun Corp, Hindustan Copper and Hindustan Zinc were up in the range of 2.80- 0.50 per cent. The Nifty Metal index was trading over 1 per cent higher at 2,401.95 levels.

SAIL has seen its market value nearly halve in the past five months; the stock hit its 15-year low last month. Global trade war concerns, too, have kept the Street cautious. Hence, the firm being allowed merchant iron ore sales for part of its produce — even if for just two years — can help revenues and earnings in the interim. The move also comes at a time when global iron ore prices remain firm on the back of supply constraints. READ MORE  

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