Lower iron prices a double whammy for NMDC

Declining international rates of iron ore pose risk to company's domestic sales as well as exports

NMDC has so far impressed investors with good volume growth, firm realisations and is also expected to report good performance in the March quarter (Q4). However, sliding international iron ore prices is a concern, and as a result, analysts are cautious about the company's prospects.
 
NMDC's iron ore sales for the month of April at 3.56 million tonnes (mt) marked a strong 40 per cent growth year-on-year (y-o-y), led by rising sales to clients outside Chhattisgarh. There has been good demand from players such as JSW Steel and RINL. Edelweiss data indicate JSW Steel procured three times higher rakes (66 against 21 in March) and RINL 166 rakes in April versus 126 in March. The strong domestic demand and growing steel volumes bode well for iron ore miner NMDC. It has also enabled NMDC to maintain prices for its produce even as international prices have declined. After four successive hikes from November to March, the company has rolled over iron ore prices in April and May. But, in light of the sharp fall in international iron ore prices, risk to domestic prices has increased.
 
The 62-Fe grade iron ore prices, for instance, at Tianjin port (China), which had crossed $90 a tonne in February, are now around $60 a tonne levels. The rupee, too, has gained versus the dollar. If prices don't rebound, NMDC may be forced to cut prices moving forward. NMDC's stock price, too, has started reflecting the trend. After scaling its 52-week high of Rs 152.50 at the start of March, it has corrected to Rs 126 levels now.

 
Analysts at Edelweiss say the company may find it difficult to hike prices further as import parity has declined to 17-months' low. They believe, major customers along the West coast may find imports cheaper, which could exert pressure on NMDC's volumes. The West and South Indian steel producers have to incur high logistic costs for transporting NMDC's ore from Odisha or Chhattisgarh, which costs an estimated at $25-30 a tonne, according to Kotak Institutional Equities. Thus, with the fall in global iron ore prices, imports can increase.
 
Lower international iron ore prices also does not bode well for NMDC's exports. After the government removed export duty for low-grade iron ore a year ago, NMDC has benefitted from exports. It had exported 2.1 mt of iron ore in 9MFY17, compared with 0.4 mt in 9MFY16, partly supported by a reduction of railway freight on iron ore exports. However, the trend has reversed and the company exported only 45 rakes in April 2017 versus 74 rakes in March 2017, according to Edelweiss data. This declining trend also adds to the concerns.
 
Thus, it is not surprising that analysts at Kotak maintain a cautious outlook. Edelweiss, too, said the stock is trading at 6.5x FY19 Ebitda, which is in line with global peers, but in the top quartile of its seven-year trading range and hence they maintain the "hold" rating.