Sesa Goa, a Vedanta Group company, which is targeting to augment iron ore output to 50 mtpa by FY14 from 20 mtpa in FY10, is all set to benefit from higher-than-expected iron ore price settlement between the Japanese steel makers and the Australian miners. This will result in 35% rise in FY11 iron ore blended realisation for Sesa Goa, say experts.
Forty years of iron ore benchmarking system has been breached as Vale and BHP Billiton have signed quarterly contracts with Japanese steelmakers. Also, similar to 2009, the Japanese has acceded to Australian miners? demand at higher-than-consensus expectations, with 90% y-o-y rise in iron ore prices to $120 per tonne (for Q1FY11).
According to Abhijit Mitra, an analyst with ICICI Securitites, ?Change in pricing mechanism will increase volatility. Iron ore contract price has crossed its 2008 peak and spot price is also approaching towards the peak level of 2008. While increased exposure to spot pricing will improve Q1-Q2FY11 profitability, higher price volatility should lead to contraction in Sesa Goa?s valuation multiple to account for increased risk,? Mitra said in his recent report. The new pricing policy is vastly different from the existing yearly contracts. The policy may permit the iron ore makers to revisit their pricing every quarter and make upward revisions to their contract prices, in line with spot market trends.
According to a CLSA report, the main factor driving up iron ore prices is rising Chinese steel output and China ?s rising import dependency on iron ore. China now accounts for 50% of global steel output as compared to 35% two years back. Sesa Goa exports iron ore mainly to China and the company operates largely on spot market basis.
Experts believe, strong iron ore prices and rising production will ensure a strong growth in FY11 for the company. They are maintaining a buy for the stock, but also said contract prices will increase with volatility in spot prices, which would ultimately make the stock price volatile.
Sesa Goa registered a 38.9% y-o-y growth in net revenue to Rs 1,889.2 crore during the third quarter ended December 2009. Iron ore sales volumes were up 24.9% y-o-y to 6.79 million tonne, which includes Dempo?s sales volume of 1.7 million tonne. Average iron ore realisations increased by 14.2% y-o-y to $54 per tonne on account of higher proportion of spot sales.