Vedanta Group company Sesa Goa?s recent Rs 1,750-crore acquisition of 100% stake in VS Dempo & Company has come at an extremely fortuitous time.
According to experts, though the deal may not mean more bargaining power for Sesa Goa, it comes when the industry is emerging out of a downward spiral with improvement in prices evident already. This would mean a significant up tick in the earnings for Sesa Goa. Though the year 2008-09 saw a 30% profit growth, Sesa Goa has suffered over the past two quarters with the weakening of spot prices of iron ore. While prices still hover way below their peaks, renewed interest from China this year together with the recovery in the commodity prices have firmed up iron ore spot prices from their abysmal lows. The deal will allow Sesa Goa to sell bigger quantities in the export market, as Dempo is one of the largest producers of iron ore in Goa with total reserves of 70 million tonne, and both export hefty amounts to China and Japan, which may believe will be the first to come out of the economic downturn.
After acquiring Dempo mines, Sesa Goa is determined to grow and has set itself a target of 50 million tonne per annum (mtpa) over the next two-three years. But will this acquisition give Sesa Goa any leverage to determine prices? In other words, will there be any significant tilt in the balance of power? The answer seems to be an emphatic ?no?. Dempo sells about 60% of its iron ore production at spot prices. Similarly, Sesa Goa sells about 80% of its output at spot prices. Dempo has been a preferred supplier to Nippon Steel for a long time now and sells 1 mtpa through long-term contracts, which comes as an added advantage for Sesa. Experts believe that iron ore prices are likely to remain broadly stable, even if the demand from China is increasing.
According to industry watchers, Sesa can take a call as to where to sell-whether in spot or in long term contract-depending on the market conditions. If the spot prices, currently at $75/tonne, are better than the contract prices ($62/tonne), Sesa Goa might decide to sell more at spot prices.
Industry experts believe, consolidation of suppliers in Australia and Brazil will ensure a balance in demand and supply. Dempo?s total reserves and resources are 42 million tonne and 28 million tonne respectively. As much as 90% of the production comes from two main mines. One of the mines shares a common boundary with Sesa?s, which may offer synergies in logistics and accretion of reserves.
India exported about 100 million tonne of iron ore last year, of which Sesa Goa exported about 15 million tonne. After the acquisition of Dempo, Sesa Goa would now export about 25 million tonne of iron ore, which means 25% of the total Indian iron ore exports. This may be significant in India, but on global basis, the combined entity will still be a small player.
