Why Domestic Iron Ore Prices Are Likely To Rebound
Iron ore prices have been falling for two straight months on weak demand amid the virus outbreak.
Domestic iron ore prices are likely to rebound as steel mills ramp up production after the lockdown curbs were eased and the world’s biggest producer of the steel-making ingredient shut operations at a mine.
NMDC Ltd.—India’s largest iron ore miner—had cut prices of lumps and fines for two straight months to the lowest in a year on weak demand amid the new coronavirus outbreak. But analysts suggest that prices may improve.
According to JP Morgan, increase in output by steelmakers, iron ore exports from Odisha becoming profitable at current spot prices and higher sales by NMDC are expected to lift prices of the key raw material.
Rakesh Arora, managing partner at Go India Advisors, said steel output is recovering in India, and mills had stocked up raw material till March in view of a disruption to 30% of iron ore production. Now, he said, balance is starting to restore.
“The production from newly auctioned mines will take some time and even when it comes the cost is Rs 1,000/tonne higher. Iron ore, including pellets, exports are rising and domestic demand is improving,” Arora told BloombergQuint. “[We] expect domestic iron ore prices to improve 30-40% over next the two-three months.”
NMDC has yet to respond to BloombergQuint’s emailed queries.
Indian steel mills have been hit because of the government’s restrictions on production and movement of people as it tried to prevent the spread of the Covid-19 disease. That deepened the slump in output of the alloy as new construction and purchases of cars and houses were delayed, hurting demand for iron ore. But as restrictions are eased, steelmakers are gradually ramping up production.
India’s steel output for May jumped more than threefold over the previous month, Morgan Stanley said in a report citing Joint Plant Committee’s data. But output in May was still down year-on-year, it said.
Crude steel production of JSW Steel Ltd.—India’s largest steelmaker—more than doubled over the previous month at 12.48 lakh tonnes in May. Flats and long products witnessed a growth of 163% and 124% at 9.05 lakh tonnes and 2 lakh tonnes, respectively.
Also, domestic iron ore prices are trading at a discount to international prices, which rallied more than 20% in last two months. This gap is expected to increase as a Brazilian labour court ordered Vale SA shut operations at its Itabira complex, accounting for about a 10th of its output, after 188 workers tested positive for coronavirus, Bloomberg reported.
Iron ore prices surged 6% to $103.35 a tonne in Singapore on Monday, the highest since August 2019, on supply woes and concerns that surging Covid-19 cases in Brazil will disrupt other mines.
That, along with higher domestic iron ore production, may keep the prices of the raw material stable, according to Amit Dixit, assistant vice president-research at Edelweiss Securities.
But higher iron ore prices will increase cost of production for steelmakers.
Besides, Indian steel mills have been witnessing narrowing spreads—difference between selling price and cost—on higher export volumes.
“Bulk of sales for domestic steel players continues to be in the export market (65-70% versus normal levels of 15-20%),” according to Edelweiss Securities. “But export prices continue to remain at a discount to domestic steel prices (currently at 14%). As a result of steel margin continues to remain under pressure.”
Shares of NMDC, however, closed about 3% higher on Monday in anticipation of a price rise and higher demand. That compares with a flat Nifty 50 Index.
