How JSW Steel's Sajjan Jindal turned steel king to ore pauper in 4 months
MUMBAI/KOLKATA: Four months ago, Sajjan Jindal's JSW Steel raced past Tata Steel to emerge as India's second-largest steelmaker. But he didn't get too much time to enjoy the view at the top. A series of abrupt and unexpected events has since hit iron ore supplies, stalling production at his plant in Vijaynagar. It is now running at just 30% of the installed capacity of 10 million tonnes.
This July, the Supreme Court ordered suspension of mining in Karnataka, following reports of rampant illegal mining, and directed sale of about 25 million tonnes of seized ore through e-auctions. Things got worse for JSW in September, when the court asked NMDC, the state-owned miner, to annul all long-term contracts with steelmakers in Karnataka and start selling only through auctions. JSW had contracts with NMDC for the supply of a fourth of its total requirements. This tap has now run dry for Jindal.
JSW Steel needs 16 million tonnes of ore a year, but does not own a mine nor has enough contracts for assured supply. It now has to depend almost entirely on auctions.
Jindal, 51, has perhaps hit the worst patch of his career. The CBI 'visited' his offices on October 3, seeking information about its iron ore procurement. He has a Rs 14,200-crore debt to service, the Rs 2,157-crore Ispat Industries acquisition to digest and a 2-million tonne expansion to rethink. The stock has lost half its value in exactly a year, and 8.9% in the past month. In contrast, the Sensex declined 16% in one year and rose 0.4% in a month.
This July, the Supreme Court ordered suspension of mining in Karnataka, following reports of rampant illegal mining, and directed sale of about 25 million tonnes of seized ore through e-auctions. Things got worse for JSW in September, when the court asked NMDC, the state-owned miner, to annul all long-term contracts with steelmakers in Karnataka and start selling only through auctions. JSW had contracts with NMDC for the supply of a fourth of its total requirements. This tap has now run dry for Jindal.
JSW Steel needs 16 million tonnes of ore a year, but does not own a mine nor has enough contracts for assured supply. It now has to depend almost entirely on auctions.
Jindal, 51, has perhaps hit the worst patch of his career. The CBI 'visited' his offices on October 3, seeking information about its iron ore procurement. He has a Rs 14,200-crore debt to service, the Rs 2,157-crore Ispat Industries acquisition to digest and a 2-million tonne expansion to rethink. The stock has lost half its value in exactly a year, and 8.9% in the past month. In contrast, the Sensex declined 16% in one year and rose 0.4% in a month.
| |
Unlike other large steelmakers such as the Tatas, JSW Steel does not own captive mines. "No company can run just on the basis of buying raw materials through auctions," says JSW Steel Joint MD Seshagiri Rao, sitting in his fourth-floor office in the sprawling Jindal Mansion in south Mumbai. "Our costs are going up and our customers are worried."
Rao, who oversees the finances for JSW and is widely seen as the group's second-in-command, isn't being dramatic. Earlier, JSW was buying ore from NMDC at Rs 2,880 a tonne. With that contract now cancelled, the company bought 1.3 million tonnes from the auction at about Rs 4,330 a tonne. The reserve price at the October 4 auction was 3,300 for high-grade ore.
Sajjan Jindal was travelling abroad and was unavailable for comment.
Mumbai-based Elara Capital estimates JSW's EBIDTA will fall to about $75 a tonne from $125 due to higher costs. That's a hit of $50 million (Rs 250 crore) for every million tonne of steel it makes.
IRON ORE PRICES SET TO RISE FURTHER
Iron ore prices have risen by 75% since last year, and look set to go up further. Demand from China pushed up ore prices to $200 a tonne in March 2008. This incentivised rampant illegal mining in Karnataka and Goa. According to Commodity Online, iron ore is likely to sell above $150 a tonne till 2020.
POSTED BY-ASHRAF HUSSAIN
PGDM 1ST