NMDC FY17 realisations to take a hit due to iron ore glut

As on July 2016, ore stockpiles at mines in Odisha and Jharkhand stood at 145 mn tonne, up 12% y-o-y

State-owned NMDC, the country's largest iron ore producer and exporter, is expected to witness a fall in realisations in the year ending March because of the glut situation in domestic iron ore market.

"Over supply in the domestic market mainly from Odisha will put pressure on ore prices and this is expected to hit realisations of the company on year-on-year basis," a top official with NMDC told Business Standard.

As on July 31, 2016 stockpiles of the ore at mine-heads in Odisha and Jharkhand stood at 145 million tonne (from Odisha and Jharkhand), up 12 percent from same period last year, according to Indian Bureau of Mines data.

"There being no demand for ore below 62-ferrous grade in the domestic market, there is an oversupply situation in the market," explained R K Sharma, secretary general at Federation of Indian Mineral Industries.

In the year ended March, NMDC saw its topline halving to Rs 6,400 crore along with its operating profit, which tumbled 52 percent to Rs 4,778 crore from same period last year.

"In terms of volume, NMDC has its entire customer base intact and so sales and production in the year ending March would be about 33 million tonne," said the NMDC official.

As per NMDC website, the company produced 30.44 million tonne in FY15 while sales were at 30.51 million.

"We downgrade NMDC to underperform from neutral) given domestic iron ore supply with more expected to come from newly auctioned mines, limited scope for NMDC to raise its output given capacity constraints (FY17 utilisation at 90 percent) and imminent correction in global ore prices," said Credit Suisse report.

NMDC's customers are also getting self-reliant- the top- five Indian steel players would soon have 65 percent captive ore, said the report.

"Atleast for the next couple of years our customer base will remain intact as it will take a while for companies to start production from their captive mines," said the NMDC official. "We have targeted higher production in FY18 to 35 million tonne," he added.

Global pricing scenario for iron ore is also not too strong. As per the World Bank report, new low-cost capacity is expected online in 2017, notably Vale's new S11D project in Brazil. These considerations, along with rising scrap supply and an expected slowdown in China's steel production, are expected to pressure prices downward and force high-cost production to close.

Iron ore prices soared 20 percent for a fourth consecutive quarter, on strong steel demand in China, supply constraints, and low stocks. December prices of $80 per tonne were nearly double those of a year earlier. However, prices softened into January, with China's inventories rising and seasonal demand expected to weaken. (see chart)

"It is difficult to give price outlook for 2017-18 but overall for the current fiscal realisations will be better in second half of the year compared with first half," said the NMDC official.

Meanwhile, Federation of Indian Mineral Industries has suggested solution to rein in oversupply situation of the ore.

"We have sent a wish list to the government requesting export duty on iron ore exported from ports be removed for ore upto 62 percent Fe content as against upto 58 percent Fe now," said Sharma. Also, at present railways have to send empty wagons to ports to bring back imported coal. If railway freight is reduced by 30 percent, it will make exports of iron ore viable and would provide Railways additional traffic and revenue, he added.