No respite in sight so far for NMDC

Declining volume and realisation trend will continue to weigh on revenues and profits

NMDC’s iron ore sales and production numbers for August were disappointing. Production and sales continued to fall, and at 10.52 million tonnes (mt) and 11.27 mt were 13 per cent and 17 per cent, respectively, lower than the year-ago period. Domestic iron ore demand remains soft while supplies have risen as production from Odisha, hit by the Supreme Court ban, has normalised. Additionally, many customers have resorted to imports, taking advantage of soft iron-ore prices.

Declining steel demand and prices also impacted the profitability of producers, putting pressure on iron ore demand and realisations. As international iron ore prices continued to tumble, NMDC has had to resort to a series of price cuts after January. After the latest cut at the start of September, prices of lumps and fines stand at Rs 2,850 and Rs 1,660 per wet metric tonne (WMT), which is substantially lower than the Rs 4,200 and Rs 3,060 per WMT in January .

All this has had a bearing on the profitability of NMDC. During the June  quarter, while plunging volumes marred the top line, soft realisations affected profitability. NMDC’s revenues, operating margin and profits had fallen by 48 per cent, 54 per cent and 47 per cent, respectively. Thus, it’s not surprising the stock declined from the high of Rs 187.55 a share in September 2014 to  Rs 90.10 in August 2015. Although there was some rebound on Wednesday as the stock gained nine per cent to close at Rs 104.25 apiece, sustenance of this rise is the key question.

Experts feel global iron-ore prices might have stabilised at lower levels but will remain subdued for long. Demand from China, the largest consumer of the commodity, is still under pressure. On the flip side, there are some early signs of steel demand and price recovery in India. Analysts such as Goutam Chakraborty at Emkay feel steel prices have to remain strong for a few months before there is some equilibrium between iron-ore and steel prices.

There is some buzz over the Centre notifying District Mineral Foundation contributions at 30 per cent of royalty rates for existing miners. Analysts at Kotak Institutional Equities say there is little headroom for NMDC to take effective price increases.

All these imply that one should not expect early respite for NMDC. The consensus target price of Rs 110, according to analysts polled on Bloomberg since August, also indicates a limited upside.