Morgan Stanley’s more cheerful outlook for iron ore prices in 2016, reported by Bloomberg, is probably the reason why NMDC Ltd’s share was up by 1.91% on BSE on Wednesday. That’s good news for Vedanta Ltd too, whose Goa unit is set to operate at a higher level in FY17—the Vedanta stock was up 3.29% on BSE.
The investment banker revised up its price outlook for 2016by 17% to $46 a tonne while its 2017 forecast was also revised upwards by 13% to $42 a tonne, from its earlier forecasts. While this is good news, even the revised 2016 forecast factors in a price of $35 a tonne for December quarter. The current price is around $54 a tonne, based on imported iron ore price data for China.
The revised outlook is because of Morgan Stanley’s belief that Australian iron ore suppliers are managing supply levels better, which is supporting prices. Seaborne supply is expected to increase by 0.5% in 2016, before expanding by 5% in 2017. Its belief that steel requirements in China will also support demand (it is the main buyer of seaborne iron ore) is not unfounded. In May, China’s crude steel output rose by 1.8% over a year ago, according to the World Steel Association.
If these factors play out as expected, it should be good for Indian companies. Domestic iron ore rates also take their cues from overseas prices, although factors such as export duties also influence their levels. The government has relaxed export duties on iron ore fines, which should boost exports.
In Vedanta’s case, the next few months are a low season for exports due to the monsoon. If prices remain at these levels once mining and shipments recommence, it would be good for profitability. In FY16, the company’s exit rate for iron ore in Goa was 0.8 million tonnes (mt), and it produced 2.2 mt during the year, as operations ran only for part of the year. FY17 should therefore see its Goa mines contribute more to output and profitability.
In NMDC’s case, it had to cut its domestic rates in May, in line with a declining trend in international prices. A more stable price environment will allow it to hold on to these rates, or better, increase them.
Even then, the optimistic picture painted by these revised forecasts should be taken with a pinch of salt. Much can change in this sector in a matter of a few months, with China being the biggest question mark in the steel industry. Also, some weakness in prices is expected in the fourth quarter.
While the prospects of both companies are indeed looking brighter (Vedanta’s also because of a broad improvement in metal prices), the concerns facing these stocks in the medium-to-long term still linger.
Source:Livemint