SAIL's stock rises as open market iron ore sale provides breather

The Steel Authority of India (SAIL) stock received a major boost on Tuesday, jumping over 8 per cent in intra-day trade. This followed reports that the government has given its nod to the firm for selling a fourth of its iron ore produce from captive mines to third parties (open market).
 
The initial reaction isn’t surprising, given that the development comes at a time when domestic steel demand and realisations remain under pressure, thereby weighing on SAIL’s profitability and share price.
 
SAIL has seen its market value nearly halve in the past five months; the stock hit its 15-year low last month. Global trade war concerns, too, have kept the Street cautious.
 
Hence, the firm being allowed merchant iron ore sales for part of its produce — even if for just two years — can help revenues and earnings in the interim. The move also comes at a time when global iron ore prices remain firm on the back of supply constraints.

However, the stock gave up most of its intra-day gains and closed only 0.15 per cent up. While some of it could be attributed to the fall in Sensex and the BSE Metal indices — which were down 1.7 per cent and 2.7 per cent, respectively — the rest can be attributed to the Street’s inability to quantify the gains for SAIL.
 
Although analysts look at the development in a positive light, they are not sure of the exact gains for SAIL. Consider this: the decision allowing merchant sales by SAIL is looked at addressing any potential iron ore supply situation in the country.
 
Most of the Odisha-based merchant miners will see their mining licenses expire, therefore, the move is aimed at taking care of any ore shortage for domestic steel producers, in case of a delay in the bidding process.
 
In case of the bidding process facing a delay, analysts estimate an annual shortfall of 30–35 million tonnes. If SAIL manages to ramp up production, it could end up gaining more than what is estimated by analysts at present.
 
However, for larger gains to materialise, there is need for requisite infrastructure for evacuation and sales, which analysts are not sure about given there could be beneficiation issues (process to enhance economic value of low-grade iron ore). Therefore, analysts at Edelweiss say net gains could be fairly limited for SAIL.
 
Even though they see some relief for the stock, they don’t expect merchant ore sales to be a game changer for the public sector steel maker.