Iron ore prices are a truly sensitive issue, when it comes to the steel industry. Readers would have got an interesting perspective on that from news of the recent developments between Rio Tinto and China. China arrested 4 Rio Tinto employees in July (accusing them of stealing state secrets); and in August, it accused the iron ore major of overcharging it for iron ore by a whopping $102.5 billion over a period of six years! The dragon is vehemently protesting against the manner in which iron ore prices are set (the world’s largest steel players and iron ore players set prices through mutual negotiation). Considering that the plaintiff is China, this controversy may not die down soon.
Indeed, the company that has access to iron ore reserves has tremendous power in the steel industry. And when it comes to India, NMDC is the behemoth to look out for. It is one of the precious few Indian companies that have what global steel giants like Arcelor Mittal and Posco and numerous Indian steel companies like Essar, RINL, JSW and Ispat Industries have been lusting for – access – to the mineral wealth of India. Investors would relish such a safe, long term bet.
No wonder then, that the government has retained a titanic hold on this company with a huge 98.38% so far. Now it has decided to sell off some of its family silver and divest 8.38% of stake through an IPO and then follow it up with another public offer later on. This is expected to make the Indian government richer by a phenomenal Rs.120 billion!
However, financial year 2008-09 was not a great year in terms of demand. Both production (marginally) and sales (by 6% to 26.47 mt) fell for the company, as demand slowdown in the steel sector meant that steel majors like Essar, JSW, et al, reduced their purchasing in the third quarter. Despite that, NMDC did show an impressive increase in profits by 34.49% to Rs.43.72 billion and sales revenue of Rs.75.64 billion.
Iron ore prices played a major role in affecting this anomaly. Last October, the company revised the prices of iron ore fines upwards by 10.5% for domestic steel players and 40% for iron ore. In an exclusive to B&E, Rana Som, CMD, NMDC, reiterated, “International benchmarking of iron ore prices has always been done by the major players of sea borne trade.” There was widespread protest by steel players, but NMDC’s near monopoly position gives it the leeway. As price corrections happened in the international market, the company also cut back on prices by 25% in December. It also managed to grab a massive 102% price hike for South Korean and Japanese steel mills last year.
his got the Commerce ministry into action; which stated that this kind of price hike could be detrimental to bilateral trade relations. The company has again cut back on the rates for export to these companies in July, 2009; 32.95% down for iron ore fines and 44.47% down on iron ore lumps. NMDC saw a drop in profits for quarter ending June 2009 by 21.15% to Rs.7.74 billion due to ore prices coming down. An upcoming challenge is the 10% royalty that the government is planning to charge iron ore players. Ashutosh Tiwari, Analyst, KR Choksey Securities, argues, “This won’t affect NMDC much as it sells around 85% of its iron ore in the domestic market. It’ll affect Sesa Goa, which relies heavily on exports.” NMDC can pass the price hike to customers. Sesa Goa will find that hard to do.
The company plans a capex of over Rs.200 billion by 2014 in its various expansions, mostly through internal accruals & partly through debt. Going forward is in fact the new mantra for NMDC, which is on the verge of fuelling its forward integration initiative into steel production. Would this create synergy problems? As per Som, “The key synergy is extension of our role in the value chain.” With their huge cash flows, NMDC would find it relatively easy to diversify, according to Ashutosh of KR Choksey Securities. Acquiring knowledge & expertise isn’t difficult, and the value addition is significant. Also, this would reduce their exposure to ore prices, so it makes sense sooner rather than later.
Indeed, the company that has access to iron ore reserves has tremendous power in the steel industry. And when it comes to India, NMDC is the behemoth to look out for. It is one of the precious few Indian companies that have what global steel giants like Arcelor Mittal and Posco and numerous Indian steel companies like Essar, RINL, JSW and Ispat Industries have been lusting for – access – to the mineral wealth of India. Investors would relish such a safe, long term bet.
No wonder then, that the government has retained a titanic hold on this company with a huge 98.38% so far. Now it has decided to sell off some of its family silver and divest 8.38% of stake through an IPO and then follow it up with another public offer later on. This is expected to make the Indian government richer by a phenomenal Rs.120 billion!
However, financial year 2008-09 was not a great year in terms of demand. Both production (marginally) and sales (by 6% to 26.47 mt) fell for the company, as demand slowdown in the steel sector meant that steel majors like Essar, JSW, et al, reduced their purchasing in the third quarter. Despite that, NMDC did show an impressive increase in profits by 34.49% to Rs.43.72 billion and sales revenue of Rs.75.64 billion.
Iron ore prices played a major role in affecting this anomaly. Last October, the company revised the prices of iron ore fines upwards by 10.5% for domestic steel players and 40% for iron ore. In an exclusive to B&E, Rana Som, CMD, NMDC, reiterated, “International benchmarking of iron ore prices has always been done by the major players of sea borne trade.” There was widespread protest by steel players, but NMDC’s near monopoly position gives it the leeway. As price corrections happened in the international market, the company also cut back on prices by 25% in December. It also managed to grab a massive 102% price hike for South Korean and Japanese steel mills last year.
his got the Commerce ministry into action; which stated that this kind of price hike could be detrimental to bilateral trade relations. The company has again cut back on the rates for export to these companies in July, 2009; 32.95% down for iron ore fines and 44.47% down on iron ore lumps. NMDC saw a drop in profits for quarter ending June 2009 by 21.15% to Rs.7.74 billion due to ore prices coming down. An upcoming challenge is the 10% royalty that the government is planning to charge iron ore players. Ashutosh Tiwari, Analyst, KR Choksey Securities, argues, “This won’t affect NMDC much as it sells around 85% of its iron ore in the domestic market. It’ll affect Sesa Goa, which relies heavily on exports.” NMDC can pass the price hike to customers. Sesa Goa will find that hard to do.
The company plans a capex of over Rs.200 billion by 2014 in its various expansions, mostly through internal accruals & partly through debt. Going forward is in fact the new mantra for NMDC, which is on the verge of fuelling its forward integration initiative into steel production. Would this create synergy problems? As per Som, “The key synergy is extension of our role in the value chain.” With their huge cash flows, NMDC would find it relatively easy to diversify, according to Ashutosh of KR Choksey Securities. Acquiring knowledge & expertise isn’t difficult, and the value addition is significant. Also, this would reduce their exposure to ore prices, so it makes sense sooner rather than later.
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