MUMBAI: NMDC’s iron ore sales in May reflect the slowdown in steel production because of the lockdown. But offtake could see a pick-up in the second half of the year as construction and manufacturing activity gather pace. Investors seem to be focusing on this demand revival as NMDC’s share price rose about 2% on Tuesday, having gained 14% in the past month.
While sales fell 24% year-on-year in May to 2.55 million tonnes, they were higher than 1.8 million tonnes sold in April, indicating a modest recovery as steel companies ramp up production on easing of lockdown curbs. In April, sales had slumped 38%.
The miner has been trying to drive sales through price cuts. For the second month in a row, the company, in May, cut prices of iron ore lumps by 15% and those off fines by about 17%. In fact, NMDC has been cutting iron ore prices for sometime now. As such, the difference between global and domestic iron ore prices has widened considerably.
Even so, lower iron ore prices will improve profitability of steel companies. “While in the near term, domestic iron ore industry growth is likely to drag due to the lockdown, we believe demand will revive gradually from Q2FY21, given low domestic iron ore prices of USD 31 per tonne vs USD 90 per tonne globally will make domestic steelmakers competitive,” said Elara Capital in a recent note to clients.
Besides, analysts also see the large gap between domestic and international prices as unsustainable. This could narrow after the domestic steel industry stabilises in the coming quarters and demand goes up. As such, demand for iron ore will be in sync with the steel industry’s growth.
A positive could be if NMDC raises its prices in the coming quarters.
Nevertheless, in a negative, steel demand from auto sector remains tepid amid weak sales, while construction activity is still under pressure. With the economy forecast to contract, there are chances steel demand will remain subdued.
Therefore investors banking on a quick revival could be disappointed. While the stock is quoting at a price-earnings multiple of 5.5 times trailing 12-month earnings, it may remain in the slow lane for now.