One of the factors supporting the government’s offer for sale of shares in NMDC Ltd, as part of its divestment programme, was a firm trend in iron ore prices. Since then, prices have risen by another 8%. The speed at which they have been rising is surprising.
Earlier this year, iron ore prices had tumbled owing to the slowdown in China’s economic growth, its effect on steel production, and the consequent impact on iron ore imports. The economic slowdown in the European Union (EU)—another large iron ore importer—was another factor. The EU’s steel industry continues to be in poor shape, as shown in global steel production data for November released by the World Steel Association on Thursday.
The EU’s steel output fell by 5.3% from a year ago, and declined by 4.3% sequentially. The winter months see lower production in this region. But China’s output during November was up by a sharp 13.7% from a year ago, which is partly explained by a low base effect. On a sequential basis, output was down by 2.7%.
But China’s output has been holding steady in the past few months, giving rise to expectations that the country is set to recover. China comes as a strong support to the global steel market, at a time when output in most other major steel producing regions such as the EU, North America and the Commonwealth of Independent States is declining from a year ago. China’s growth ensured that global crude steel production rose by 5.1% from a year earlier, since it contributes to 47.5% of global output. Some news reports have stated that China’s output growth is driven by restocking and once that is over, the trend will turn bearish again.
Whether that happens or not will become visible in the next few months and will also determine whether the firm trend in iron ore prices continues. It keeps the risk alive that prices may continue to remain volatile in early 2013, as was visible in the second half of 2012.
But iron ore price trends alone are not the key worry for Indian miners. They are hamstrung by a ban on mining in two large iron ore producing states—Karnataka and Goa. In Karnataka, some mines have been allowed to restart mining, though this accounts for a small amount compared with what the total used to be.
Among the key domestic firms, NMDC is in a relatively better position as it continues to mine, though on a limited basis, in Karnataka. And, it does not have any mines in Goa. Rising prices will benefit the company, as it has now moved to a monthly pricing mechanism.
But Sesa Goa Ltd’s mines in both Karnataka and Goa have been affected by the ban. Clarity on when it can resume mining will bring its iron ore operations back into focus. The performance of its associate company, Cairn India Ltd, and the impending consolidation of the Vedanta group’s operations has played a bigger role in determining its valuations. In the past week, the Sesa Goa stock has gained by 10%, while NMDC is up 2%.