NMDC, merchant miners to benefit from global iron ore price rally

Revival of Chinese steel production has bolstered demand; simultaneously, disruptions in Brazil after soaring Covid cases has crimped supplies, raising prices

NMDC, the country’s largest commercial iron ore producer and others are set to benefit from a surge in global seaborne iron ore prices. The rally in iron ore prices stems primarily from the supply crunch in Brazil, which is still coping with the spike in Covid-19 cases and will calm the frayed nerves of iron ore miners in India at a time when domestic demand has gone downhill.

International iron ore prices are now trending over $100 per tonne, clocking a year-on-year (YoY) gain of 10 per cent. The revival of Chinese steel production has bolstered demand for the key steel making ingredient. Simultaneously, disruptions in Brazil after soaring Covid cases has crimped supplies, raising prices.

Brazil is the world’s second largest iron ore exporter. But its exacerbating Covid-19 crisis with a count of over 600,000 cases has triggered worries on supplies. Top Brazilian producer Vale has pruned its 2020 iron ore production guidance from 340-355 million tonnes (mt) to 310-330 mt. The rapid spread of Coronavirus cases in Brazil and rising infections among workers had precipitated fears of mining activity getting curtailed even though mining has been categorised as ‘essential service’.

But China, the originator of the virus, has seen a swift rebound in its steel output. Demand for iron ore in China is expected to stay robust as the country would see a strong recovery in steel production. The recovery in China spells favourably for exporters as China makes half of the world’s steel and has a whopping share of 70 per cent in global seaborne trade. At major ports in China, iron ore inventories are tapering. Iron ore prices are currently trading at a 52-week high on the Dalian Commodity Exchange in China.

India has already witnessed an uptrend in iron ore exports- they grew 17 per cent y-o-y in April.

“Export demand will perk up Indian merchant iron ore miners. China has shown renewed appetite for absorbing iron ore. The supply crunch in Brazil is unlikely to be stabilised for the next two to three months. This offers a huge opportunity for merchant producers to scale up their shipments. Both NMDC and the big merchant miners in Odisha stand to gain from the rally in iron ore prices”, said an analyst tracking metals sector.

In the domestic market, merchant producers were grappling with flagging demand as steel and other end use industries were operating at barely half of their rated capacities. Moreover, the non-resumption of mining activity from merchant leases in Odisha after auctions has magnified the supply woes. Nineteen iron and manganese blocks whose lease tenure lapsed on March 31, could not restart production as some formal approvals were still pending from the state government.

As Covid-19 sucked demand, NMDC was forced to go for two back to back price cuts in iron ore for both lumps and fines. Its iron ore volumes in April 2020 tanked 49 per cent y-oy to 1.38 million tonnes, forcing the public sector miner to slash prices by Rs 500 per tonne. NMDC, the country’s single biggest miner was made to swallow a bitter pill again in May as it reduced prices of both lumps and fines by Rs 400 a tonne, effective May 9.