Ore prices could fall further due to weaker demand and increasing supplies. Iron ore producer Sesa Goa’s stock price has come off by about 47 per cent since early June 2008. That’s probably because spot prices of iron ore have been on their way down, correcting by about 30 per cent to $130 per tonne since July 2008.
Moreover, the demand for low-grade iron ore, which is what Rs 3,579 crore Sesa Goa sells, has been on the wane with China buying less of Indian grade iron ore that requires more coke while processing. China has preferred to import high quality ore from Brazil and Australia. As such, Sesa Goa’s August shipments were down 53 per cent y-o-y to about 2.5 million tonnes.
Analysts believe that high inventories at Chinese ports and the excess supply from other countries, could keep the demand for low-grade iron ore weak for some more time. Chinese pig iron production – one of the main drivers of the demand for sea-borne iron-ore—-has moderated to 8.8 per cent y-o-y in January- June 2008. According to reports, production has fallen for the first time in eight years by about 1 per cent in August to 40 million tonnes.
The growth in CY07 was far higher at 15 per cent and even stronger at 24 per cent in CY06.
Meanwhile, supply from mining majors BHP-Billiton and Rio Tinto has been rising. In the first half of CY08, BHP’s production grew 14 per cent while Rio’s production was up 14.5 per cent. Australian mining firm FMG is expected to add to the supply.
As such, prices of ore could come down further. Also, freight rates have come off, reducing the advantage that India enjoyed over Brazil (the mining company Vale is from Brazil), and further reducing demand for Sesa Goa’s iron ore.
Sesa Goa is ramping up production to 25 million tonnes by 2011 from around 12 million tonnes currently. In 2007, the company was selling more through long –term contracts, but shifted to more spot price contract when spot prices were rising in March 2008.
Of late, with spot market prices correcting, the company may rethink its production plans and could slow down the pace. At the current price of Rs 103, the stock trades at four times its estimated FY09 earnings.
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[...] Mining projected as the backbone of Goa’s economy threatens to break it in the years to come. Forests are being denuded and with it water resources are becoming extinct with every year of mining activity in the hinterland. [...]