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Sesa Goa – Rising spot price un-sustainable

November 11, 2009

The iron ore spot price for benchmark-grade 63.5% Fe CFR China has risen 20% since its Sept. low and 8% over the past week. As per SBB, the current iron ore price is US$100.5/t, 11% below its peak level in Aug. 2009.

While Sesa would benefit from a higher spot price, given that it exports 85% of its
output to China, we believe that this price may not be sustainable over the medium term.

The widening price spread between domestic iron ore and imports (China domestic concentrate prices up only 5% over the past 2 months) should encourage mills to use more domestic ore; and (2) Chinese steel prices have underperformed domestic and imported iron ore prices, with mills operating close to cash cost.

Sesa Goa SFIO Investigation:
A complaint has been filed by a shareholder of Sesa Industries in 2003 prior to the acquisition by the current promoter, Vedanta (VED.L, 2,338p; Neutral), in April 2007. As per company management, the current promoters are ring-fenced from the case. To put things into perspective, Sesa’s revenue in FY03 was Rs6bn vs. Rs50bn in FY09. The investigation must be completed within 6 months, and may cause some volatility in the stock price.

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