Realisation concerns deepen for NMDC after company cuts prices again

Cuts iron ore prices for second straight month in May

After slashing iron ore prices by 15-16 per cent in April, NMDC has taken similar price cuts in May. 

The Street is worried with the latest action, given how India’s largest iron ore miner has seen its April sales dip by almost half to 1.38 million tonnes (mt), from 2.7 mt a year ago (despite price cuts taken earlier).

While there are not many challenges for the country’s largest iron ore player on the production front - with mining being included under essential services - it is the demand disruption for end products (steel) against the backdrop of Covid-19-led disruption that has been intense, pulling down sales.

Not surprisingly, the stock, which had rebounded by almost 30 per cent from March lows to Rs 83 in April, has given up almost half the gains. 

The share price rebound in April was also led by resumption of activities in China, which has brought comfort to international iron ore prices. 

There is some impact visible. Per-tonne iron ore prices, excluding China, are now hovering around $86. They had corrected from $96-levels in January to $80 by March-end.

 

 

Despite rising international iron ore prices, challenges on the domestic front have forced NMDC to cut prices again. 

Domestic steel sales volumes have remained deeply impacted, with almost negligible sales for long and flat products in April. May is likely to be a washout as well.

Analysts say India has never faced such high demand uncertainty and domestic steel consumption is set to dip 13 per cent year-on-year in 2020-21 (FY21).

On the mining front, demand pangs are expected to be severe as well, with volumes and margins dipping to lifetime lows, say analysts at Edelweiss. 

Will price cuts lift volumes? Analysts believe such a move is unlikely to help improve NMDC's sales. In fact, they will only hurt realisations.

Among other concerns are resuming output from NMDC's Donimalai mine, which brokerages had been factoring in their estimates to resume from the second half of FY21. The lease renewal for the 7-mt per annum (mtpa) Donimalai mine by the Karnataka state government was expected in 2019-20, but there is little clarity on the timeline.

The company may also see delay in commissioning of its 3-mtpa steel plant at Nagarnar (Chhattisgarh), says IIFL. 

The brokerage had already cut its FY21 and 2021-22 earnings before interest, tax, depreciation, and amortisation estimates by 19-29 per cent due to Covid-19-related disruption. 

The only comforting factor is NMDC's cash-surplus (and debt-free) status.