Shares of NMDC Ltd, a major iron ore producer, closed with a fall of nearly 2% in Monday’s trading session on the NSE. The company has reduced the prices of this raw material by 20-25% since the last revision on May 25. Iron ore fines (64% Fe) are currently priced at Rs 3,310 per tonne, the lowest level since November 2020. The price of lump ore (65.5% Fe) is Rs 4,400 per tonne.
This is the second reduction in prices by NMDC after the government’s decision to increase export duty on all grades of iron ore and levy export duty on pellets. With this move of the government, there will be more supply of iron ore in the domestic markets. Note that this comes at a time when the demand outlook is subdued. For one, the arrival of the monsoon season will impact steel demand as construction activities slow down. Moreover, consumers are in wait-and-watch mode, and are expecting further price correction.
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Not only this, analysts expect iron ore prices to decline going forward, as the domestic market will not be able to absorb the excess capacity. “We see further exposure to prices as at current levels, on an ex-mine basis, NMDC and Odisha prices are at par. Amit Dixit, analyst at Edelweiss Securities, said in a note, “In the recent past, NMDC has offered Odisha-based miners a 10% discount on their price.
This is likely to impact profitability of NMDC, which reported a 43% year-on-year decline in consolidated Ebitda (earnings before interest, tax, depreciation and amortization) in the March quarter. Sequentially, the measure fell 18%.
However, global markets speak of a different trend. “Global (Australia) iron ore prices have increased by about 4% to $133 a tonne in June-22 from $128 a tonne in May-22. “NMDC’s discount on global prices has so far increased to 57.4% in June-22 as against 55.4% discount in May-22,” analysts at Nomura Financial Advisory and Securities (India) said in a report on June 6. He further added, “Local iron ore prices remain at a significant discount to imported ore prices (we note that local ore is inferior with higher alumina content).
Investors are heeding the above concerns, as NMDC shares have fallen over 35% on the NSE in the past one year and the stock is hovering near the 52-week low seen on May 26.
But near-term gains look limited. A May 29 report by Motilal Oswal Financial Services said, “If export duties on iron ore, pellets and steel are not reversed, we expect a significant margin compression apart from reduction in salable volumes. “
Meanwhile, a meeting of creditors and shareholders is on June 7 to approve the demerger of Nagarnar Steel Plant. But given the sluggish environment for steel and iron ore prices, the response to this demerger remains to be seen.