NMDC: Rally in iron ore prices might hit hurdles

Global iron ore prices, up 16% in a month, could come under pressure again on more supplies

The outlook for NMDC, India’s largest iron ore producer, has improved significantly in the past six months, as iron ore prices rebounded from the lows of $37.5 a tonne in December 2015 to $70-plus in April this year, then fell back to $48 and are now up at $56 levels. Consequently, NMDC’s share price also surged from Rs 75.50 to Rs 103 recently; it is around Rs 95 now.

Consolidation is expected from here. After a rebound in prices, NMDC had taken two consecutive price hikes in March and April for its produce. But, as global prices corrected to $48 a tonne in June and looking at the dynamics in the country, NMDC was forced to adjust its prices for May and June; the price of lumps has been cut by another Rs 100 a tonne in July. While the implementation of minimum import price (MIP) on steel has helped domestic steel producers report better production and realisations, iron ore supplies have improved. There is adequate supply coming from players in Odisha, Chhattisgarh, Jharkhand and other states, which is likely to keep a tab on iron ore prices in the near-term. Thus, analysts are not too optimistic on prices moving up from here and say one should not read too much in the 16 per cent rise in iron ore prices (CFR China) from $48.18 on June 2 to close to $56.

Analysts at Kotak Securities expect the iron ore market to remain in surplus for the next few years as big miners continue to increase production, which would put pressure on iron ore prices. In addition, rising domestic supply would keep domestic ore prices under pressure.

The government’s removal of export duty for low grade iron ore is positive. However, it is likely to benefit players as Vedanta, which exports most of its low-grade produce from Goa. Increasing exports of low-grade iron ore is likely to put pressure on international prices, say analysts. Analysts at HSBC say low-grade iron ore exports having less than 58 per cent Fe (ferrous) content will eventually put further pressure on benchmark ore (62.5 per cent Fe) prices. Currently, output from Goa is limited to 20 million tonnes per annum, but the state is pushing to increase this limit, which would be another negative for iron ore prices.

For NMDC, with high-grade iron ore reserves and long mine life, plans for forward-integration through steel production and strong balance sheet, its long-term growth drivers remain intact. But, near-term triggers are lacking. Analysts at Kotak estimate NMDC to register a volume-led 13 per cent annual growth in revenue and a modest three per cent in earnings during FY16-18. A proposed buyback of 801 million shares at Rs 94 each will, however, support the stock on the downside.