NMDC: Pricing outlook signals more gains

Rising volumes, realisations can lead to strong stock returns

With the rise in international iron ore prices, which has supported domestic prices too, NMDC, India’s largest ore producer, has been gaining on the bourses. Reducing iron ore inventories in China, improving Chinese demand for long steel products, rising international steel prices, and increasing demand for high grade ore in order to meet Chinese pollution norms have all led to higher global iron ore prices. And this trend is unlikely to change, which in turn augurs good news for the company.

The 62 per cent Fe-ore prices, excluding China, for instance, have risen from sub-$60 a tonne in end-October to about $70 levels now. This has helped NMDC hike prices by 10-13 per cent in December. For NMDC, which is already seeing improving volumes driving its prospects, the confidence on its earnings is only increasing. 

Analysts expect iron ore prices to remain stable. While Goutam Chakraborty at Emkay Global said the outlook for iron ore remains stable, ICICI Securities shared a similar view that the stable global outlook for iron ore was positive for NMDC. 

Demand from Chinese steelmakers, as they comply with their government’s anti-pollution push, has led to an increase in premiums for high-quality ore. The same is up by nearly five times than the premiums two years ago, analysts said. These factors also indicate a change in industry dynamics, which is now chasing value over volume and flight to quality, analysts at ICICI Securities said. The improving demand of high-grade ore and rising premiums are positives for NMDC, which also produces high-grade ore.

Meanwhile, the strong growth in India’s steel demand, as it approaches seasonally strong quarters, should further support domestic iron ore prices. Though India’s iron ore production has remained healthy, the recent Supreme Court judgment ruling out extension of its December 31 deadline for penalty payments by Odisha miners leads to some uncertainty on production from the state. In case the miners are unable to pay, there could be some disruption in output from the state. Further, the mining leases of many miners are expiring in FY20. Motilal Oswal Securities expects Indian iron ore supply to get tight over the next two-three years. They also expect 

15-20 million tonnes per annum (MTPA) demand growth over the next two-three years, as NMDC’s key customers (JSW Steel and RINL) are ramping up their production, which can lead to NMDC seeing 100 per cent utilisation of its capacity of 46 MTPA (current utilisation 80 per cent) going ahead. 

Overall, improving volumes and healthy pricing outlook should drive further gains for NMDC’s share price. In fact, analysts see a potential of 20 per cent annual returns over the next three-four years, including dividend yield of five per cent.