NMDC likely to benefit from rising pellet exports to China, says Incred Equities; retains 'add' rating

Domestic brokerage firm Incred Equities has retained its 'add' rating on NMDC, the country's largest iron ore producer, with a one-year target price of ₹319 apiece, as the brokerage believes that the company is in the sweet spot amid rising pellet export demand coming from China. 

The company's shares have been on a roll over the last 12 months, climbing from ₹104 apiece to the current level of ₹273, resulting in a multibagger gain of 162%. 

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The brokerage highlighted several key factors impacting the steel and pellet markets. It stated that high pollution levels in steel-producing regions and the unavailability of scrap in adequate quantity have made scrap more expensive compared to pellets. 

Pellet prices exhibit seasonality, as Chinese steel mills buy fewer pellets during the summer due to dust emissions during the sintering process but are forced to shift to pellets in the winter. 

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Currently, the pellet premium over iron ore is at a minimum level but is expected to revert to the mean value of US$0.50/t/% Fe content. The brokerage projects that a 67% DRI grade pellet will trade near US$150/t over the long run.

China's focus on scrap usage in electric arc furnaces led to a rapid increase in scrap usage. However, local scrap availability has stagnated, resulting in a fall in scrap usage in CY23. The decline in scrap exports from the Western world has not helped the situation for China. To curb pollution and remain cost-effective, China must import high-grade pellets, as global scrap prices are at a 10-year high compared to pellets, it noted. 

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Consequently, 65–67% pellets will likely trade at a US$40–45/t premium over iron ore in the coming months. Pellet premiums are cyclical and can rise higher in winter due to smog concerns and fall below the mean in summer.

India exports approximately 10 million tonnes of pellets to China, but most Indian pellets are of lower quality (62–63%) compared to Brazilian pellets. Since Indian pellet exports do not attract export duties like iron ore, the brokerage anticipates that the pellet makers will continue their exports to China, keeping the domestic market finely balanced.

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Please note that the pellets are a refined form of iron ore that offers several advantages in steel production, including efficiency, environmental benefits, and consistency.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before making any investment decisions.