Slipping global iron ore prices worry NMDC investors
Unless prices fall sharply, NMDC may still be able to justify in holding on to prices at current levels
NMDC Ltd was slow to increase iron ore prices when global prices soared to high levels in fiscal year 2017. Now that global prices are slipping, the company’s investors will hope it will be slow to cut them as well. Between October 2016 and early-March 2017, the prices of seaborne iron ore rose by 63.3% during which NMDC’s domestic prices rose by 15.5% (for iron ore lumps) and 24.1% (fines). Domestic market conditions would be one reason for the slower increase in prices, while the government’s desire to keep the cost of steel-making down may be another.
The global iron ore market has turned bearish, says a Bloomberg report, as bankers turn nervous about its future in a scenario where China cuts back its steel output. Whether the bear case is here to stay will be known in a few months from now. On earlier occasions too, iron prices have rebounded after falling sharply for some time, due to adverse news. Iron ore in Qingdao, China, closed at $75.5/tonne on 7 April, according to Bloomberg, which is still 35% higher than its level in October.
Unless prices fall sharply, NMDC may still be able to justify in holding on to prices at current levels. Last week, it disclosed that sales for the March quarter had risen by 14.3% over a year ago but declined by 2.9% sequentially. Average prices during the quarter are up by 10.7% in the case of lumps and 16% in the case of fines, which indicates that sales and profit should post good growth rates both over a year ago and sequentially.
Rising domestic steel capacity is a good sign for NMDC, although one worrying sign is slower growth in steel consumption. A pickup in domestic consumption will help steel makers earn better margins, improve steel output and in turn benefit the company. The main risk it is facing at present is if iron ore prices crash, as that will directly affect profitability and cash flows.
NMDC had said in December that it may exit its three-million-tonne steel project under construction through a strategic disinvestment. Clarity on whether it will focus on iron ore going forward and leave steel-making to others will be useful to investors. That will mean its cash surplus will be available for distribution, either by way of dividends or by buying back of shares. While the government is the moving force behind the return of cash, minority shareholders also gain in the process. The company’s share is up by 31% over a year ago but is below its February levels as falling global iron prices worry investors.
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