PSU increases iron ore realisations by 10%
Consensus is overplaying the pricing-power theme: India is grappling with unprecedented iron ore mining ban across various states. Where Karnataka mining has not completely resumed, the Supreme Court has ordered a ban on Goa mining now. The Shah Commission is currently preparing its report on Orissa mining and there could be potential restrictions there. NMDC is the only miner that was allowed to continue mining operations — both for its adherence to mining laws and it being a state-run entity.
NMDC took advantage of the situation, increasing iron ore realisations by 10% whereas international prices (in rupees) fell 24% during the same period. It changed its pricing formula from export-parity to arbitrary (raising prices in Aug; and cutting it in Oct/Nov-12). This situation has got the Street interested; with consensus now expecting 20% jump in FY14 realisations (over current blended realisations). HSBC’s CY2013 iron ore estimates are lower than ruling iron ore prices; and if we are correct, this would imply NMDC raising prices amid falling global ore prices; something that we do not build in.
NMDC cannot completely exploit the demand-supply imbalance: NMDC increased ore price in August, 2012 by 13%, only to cut it back by 11% each in October and November. If NMDC truly had the pricing power, there was no need for it to cut prices twice. Since it is a state-run entity, it will not be in a position, in our opinion, to completely exploit the demand-supply imbalance that persists in India. There could be price increases; but not to the tune that consensus builds in. We are 15% below consensus Ebitda for FY14e (estimates).
Change in estimates and valuations: We value NMDC on FY14e (unchanged) EV/Ebitda (enterprise value/ earnings before interest, taxes, depreciation and amortisation) of 6.0x (earlier 5.0x). To a derived EV of Rs 125/share we add Rs 55/share in net cash and deduct Rs 10/share of CWIP (construction work in progress) in the steel project (which we believe will be value destroying for NMDC) and derive our new 12-month price target of Rs 170/share (earlier Rs 150). Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for Indian stocks of 11%.
Our new target price implies a potential return, (including a 2.5% dividend yield) of 9% from the closing price of Rs 160 on December 11, 2012; as this is within the Neutral band, we are upgrading our rating to Neutral from Underweight.
NMDC cuts lump ore price by 5.9%; move fails to add cheer to steel industry
Meanwhile stung by uproar over high ore prices, NMDC the country’s largest miner has slashed price of premium lump ore by 5.9% for January 2013, its steepest cut in months. This comes even as international prices have firmed up to $145/tonne. However, the rate cut is unlikely to add much cheer to the domestic steel industry which feels the price reduction is too small.
“We have decided to slash lump ore prices by 5.9% for January 2013. However, price of iron ore fines will remain unchanged,” said Mr C S Verma, acting chairman of NMDC, who is also chairman of Steel Authority of India.
Mr Verma explained the price cut in the face of stronger international ore prices by saying the company responded to the domestic steel industry which has been critical of NMDC’s steep prices for lump ore. He was speaking after the company’s board meeting at Hyderabad on Wednesday. “About 70% of our sales come from fines, price of which remains the same at Rs 2,160 per tonne,” he added.
International prices for 62% grade iron ore went up by 24% during December 2012 and are now hovering around $145 per tonne. “Iron ore price have been firming up globally in the last one month and this implies international steel prices are also likely to go up,” Mr Verma said.
However, NMDC’s move has failed to impress the industry. R V Gumaste, managing director of Kirloskar Ferrous Industries said: “The quantum of the reduction is very small. The December realisation of pig iron prices dropped at an average of Rs 1200 per tonne as compared to prices in November. For instance the landed price of pig iron in Punjab was about Rs 33,000, a tonne in November and in December it declined Rs 2000 to Rs 31,000.
“Moreover, NMDC’s price reduction of 5.9% means Rs 300 a tonne, which is miniscule. Global prices keep fluctuating month on month and week to week. NMDC takes a long time to respond to market dynamics. When iron ore prices scraped the bottom at about $90, NMDC did not pass on the prevailing market price to steel makers, their pricing always has a lag. Thus, manufacturers don’t get any benefit from price fluctuations in the International market,” he added.
In India we should get benefit from iron ore being locally available and we (steel makers) have often expressed our willingness to pay export parity prices ex-mines. With this sort of pricing, our margins have been impacted badly, Mr Gumaste said.
Consensus is overplaying the pricing-power theme: India is grappling with unprecedented iron ore mining ban across various states. Where Karnataka mining has not completely resumed, the Supreme Court has ordered a ban on Goa mining now. The Shah Commission is currently preparing its report on Orissa mining and there could be potential restrictions there. NMDC is the only miner that was allowed to continue mining operations — both for its adherence to mining laws and it being a state-run entity.
NMDC took advantage of the situation, increasing iron ore realisations by 10% whereas international prices (in rupees) fell 24% during the same period. It changed its pricing formula from export-parity to arbitrary (raising prices in Aug; and cutting it in Oct/Nov-12). This situation has got the Street interested; with consensus now expecting 20% jump in FY14 realisations (over current blended realisations). HSBC’s CY2013 iron ore estimates are lower than ruling iron ore prices; and if we are correct, this would imply NMDC raising prices amid falling global ore prices; something that we do not build in.
NMDC cannot completely exploit the demand-supply imbalance: NMDC increased ore price in August, 2012 by 13%, only to cut it back by 11% each in October and November. If NMDC truly had the pricing power, there was no need for it to cut prices twice. Since it is a state-run entity, it will not be in a position, in our opinion, to completely exploit the demand-supply imbalance that persists in India. There could be price increases; but not to the tune that consensus builds in. We are 15% below consensus Ebitda for FY14e (estimates).
Change in estimates and valuations: We value NMDC on FY14e (unchanged) EV/Ebitda (enterprise value/ earnings before interest, taxes, depreciation and amortisation) of 6.0x (earlier 5.0x). To a derived EV of Rs 125/share we add Rs 55/share in net cash and deduct Rs 10/share of CWIP (construction work in progress) in the steel project (which we believe will be value destroying for NMDC) and derive our new 12-month price target of Rs 170/share (earlier Rs 150). Under our research model, for stocks without a volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for Indian stocks of 11%.
Our new target price implies a potential return, (including a 2.5% dividend yield) of 9% from the closing price of Rs 160 on December 11, 2012; as this is within the Neutral band, we are upgrading our rating to Neutral from Underweight.
NMDC cuts lump ore price by 5.9%; move fails to add cheer to steel industry
Meanwhile stung by uproar over high ore prices, NMDC the country’s largest miner has slashed price of premium lump ore by 5.9% for January 2013, its steepest cut in months. This comes even as international prices have firmed up to $145/tonne. However, the rate cut is unlikely to add much cheer to the domestic steel industry which feels the price reduction is too small.
“We have decided to slash lump ore prices by 5.9% for January 2013. However, price of iron ore fines will remain unchanged,” said Mr C S Verma, acting chairman of NMDC, who is also chairman of Steel Authority of India.
Mr Verma explained the price cut in the face of stronger international ore prices by saying the company responded to the domestic steel industry which has been critical of NMDC’s steep prices for lump ore. He was speaking after the company’s board meeting at Hyderabad on Wednesday. “About 70% of our sales come from fines, price of which remains the same at Rs 2,160 per tonne,” he added.
International prices for 62% grade iron ore went up by 24% during December 2012 and are now hovering around $145 per tonne. “Iron ore price have been firming up globally in the last one month and this implies international steel prices are also likely to go up,” Mr Verma said.
However, NMDC’s move has failed to impress the industry. R V Gumaste, managing director of Kirloskar Ferrous Industries said: “The quantum of the reduction is very small. The December realisation of pig iron prices dropped at an average of Rs 1200 per tonne as compared to prices in November. For instance the landed price of pig iron in Punjab was about Rs 33,000, a tonne in November and in December it declined Rs 2000 to Rs 31,000.
“Moreover, NMDC’s price reduction of 5.9% means Rs 300 a tonne, which is miniscule. Global prices keep fluctuating month on month and week to week. NMDC takes a long time to respond to market dynamics. When iron ore prices scraped the bottom at about $90, NMDC did not pass on the prevailing market price to steel makers, their pricing always has a lag. Thus, manufacturers don’t get any benefit from price fluctuations in the International market,” he added.
In India we should get benefit from iron ore being locally available and we (steel makers) have often expressed our willingness to pay export parity prices ex-mines. With this sort of pricing, our margins have been impacted badly, Mr Gumaste said.
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