These Two Factors Are Likely To Boost Margin Of Indian Pellet Makers

Falling iron ore prices and supply crunch after a Brazilian dam disaster are expected to boost profitability of Indian pellet makers.

This comes at a time pellet prices, according to Edelweiss, declined for the fourth straight month. Prices of iron ore pellets—used as a raw material in steelmaking—slumped nearly 36 percent from their September peak, it said.

Vale SA closed some of its operations after a dam disaster in Brazil—one of the country’s worst industrial tragedies—killed at least 84 people. This cut up to 40 million tonnes of iron ore—in one of the world’s bellwether commodities—and 11 million tonnes of pellet production a year, the company had said. This contributes 10 percent of global output, Vale, the world’s biggest miner of iron ore and nickel, had said.

This, coupled with falling iron ore prices, is expected to improve the margin of domestic pellet makers such as Godawari Power & Ispat Ltd., Prakash Industries Ltd. and Jindal Saw Ltd. by March.

Iron ore prices have been declining since December. NMDC Ltd., India’s largest iron ore miner, revised rates at least thrice over the last three months.

Indian pellet makers, therefore, are now expecting an 8 percent higher bid for their exports, according to the website Steelmint. Godawari Power expects pellet prices to remain firm over the next two-three years.

Vale’s dam issue will improve spreads—the difference between the cost of raw material and selling price—impacting the margin of pellet makers, as well as prices, Amit Dixit, research analyst and who tracks metals at Edelweiss Securities, said. The total production of the affected mine is 20 percent of Vale’s nine-month output for calendar year 2018 and 10 percent of the global seaborne market, he said.