NMDC’s higher realizations up against lower sales
A further increase in prices may help but NMDC needs volumes to recover
A mining company’s profits are directly affected by ore prices, other things remaining the same. On Tuesday, NMDC Ltd raised its ore prices for January by a fifth over the preceding month, after increasing them in December too. The price of iron ore lumps is higher by 35% and that of fines by 34-35%, over October. That should augur well for price-led revenue growth.
Consider what happened in the September quarter. NMDC’s iron ore sales by volume rose by only 2.8% over a year ago. But higher domestic prices alone contributed Rs600 crore to the Rs689 crore increase in the company’s sales. That underscores the important role played by price.
But other things are not staying constant. NMDC’s volume data shows a slippage in sales in the first two months of the December quarter. Total iron ore sales in October and November are down by 29% over a year ago, although how this changes after December numbers become available is to be seen.
If the decline remains as steep, then much of the increase in ore prices may only offset the decline in volumes. The contribution to profits could be less significant. That calls for some caution among investors, who have marked NMDC’s price up by 6% on news of this price hike.
Meanwhile, in Odisha, seven iron ore mines have shut down after they failed to pay court-mandated penalties, according to a 1 January Business Standard news report. This closure has taken 20 million tonnes of capacity off the market. That could lead to a tighter supply situation, which may then support prices at higher levels. That can be advantageous to NMDC.
A further increase in prices may help but NMDC needs volumes to recover. Post-December quarter results, some clarity may emerge on what is holding sales volume down, and if and when that could change.
For now, the price hike is good news but the downtrend in sales volume is not.
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