NMDC needs to grow volumes; price hikes alone won’t be enough
State-owned iron ore producer NMDC Ltd raised prices by 2-5% from Tuesday. The latest price hikes are pretty much on expected lines given that the ongoing March quarter is seasonally strong.
Moreover, global iron ore prices are also on the rebound, which has a positive bearing on domestic prices. In March so far, global (Australia) iron ore prices have risen by nearly 4% month-on-month versus the February average, said analysts at Nomura Financial Advisory and Securities (India) in a report dated 20 March.
With this, NMDC has raised prices of iron ore four times since the government removed/lowered export duty on iron ore in mid-November. The price of NMDC’s lump ore and fines now stand at ₹4,500 and ₹4,110 per tonne, which is 18% and 57% higher respectively than the levels seen in mid-November.
As such, the March quarter (Q4FY23) performance is set to be better sequentially with NMDC’s sales volumes in January and February ahead of the average volumes seen in Q3. This along with price hikes would mean better sales realization, which was a pain point last quarter. In Q3, this parameter was down by about 35% year-on-year (y-o-y) and 2% lower sequentially.
While price hikes augur well, the company’s stock has hardly budged since the latest announcement on price hike. This shows investors are likely waiting for a meaningful increase in volumes. NMDC’s iron ore sales volumes are down by 8.6% y-o-y in the eleven months ended February to 33.4 million tonnes.
Iron ore is a key raw material to manufacture steel and demand for this metal is yet to increase adequately.
“We note that the higher than historic discount of NMDC’s iron ore to import parity is mainly led by weak volume off-take,” said analysts at Kotak Institutional Equities in a report on 21 March. The broking firm has cut NMDC’s FY23 volume estimate by 2% but the impact on earnings would be offset by higher prices.
Against this backdrop, shares of NMDC are down by 9% so far in 2023. The company’s ability to meet its production volume target of 50 million tonnes in FY24 remains to be seen. Besides volume growth, meaningful price increases would also buoy investor sentiments, but analysts do not see much room for significant hikes given the muted demand environment. However, better-than-expected earnings performance in the near-term may improve outlook.
Further, it would help sentiment if steel demand improves meaningfully backed by the opening up of the Chinese economy. This is a monitorable.