NMDC has increased iron ore lump prices by just about 10% or INR180/ton (USD2.28; after adjusting for royalty) despite a 40% increase in global iron ore lump prices since January 2016, to about USD63/ ton (Fe 62%) at the beginning of March 2016. The marginal increase in iron ore lump prices by NMDC Limited will provide relief to the steel industry which is facing substantial erosion in realisation on a year-on-year basis, despite the introduction of a minimum import price on steel import in early February 2016. This leaves a wide gap of around USD20/ton-USD25/ton between domestic and international prices. However the sustainability of international ore price increase has to be watched considering subdued steel demand and overcapacity worldwide.
The small increase by NMDC comes as a surprise as the government in the FY17 budget has reduced the export duty on low grade iron ore (Fe <58%) to nil from 30% in an attempt to make domestic miners competitive in the international market. Though domestic iron ore prices do not strictly follow international price trends, abnormal gaps such as the one prevailing now are usually corrected over a few quarters as iron ore is freely traded internationally.
Had NMDC passed on the entire increase of about USD15 (adjusting for mineral royalty of 15%), the EBITDA margin for JSW Steel would have been severely impacted and would have fallen by around 4% to 5%. This is because the ability of steel players to pass on cost increases is capped by the minimum import price in the prevailing environment of excess capacity and falling international prices.
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