This is one Nifty 100 index constituent company, a commodity company, which is not leaving any stone unturned to stop the slide in its sales on account of ongoing commodities price meltdown.
This was evidenced when NMDC, the listed largest iron ore producer by volume in the country, in which 80 per cent stake is held by the government, recently made its latest monthly price and production disclosure to the stock exchanges. The disclosure laid out the rate at which it was going to sell its iron ore lump produce it revealed a very large cut of 25 per cent from the rate it which was selling the same last month (November).
This could, possibly, be the highest month-on-month fall in the sales price in NMDC’s recent history. The December selling price of iron ore lump at Rs 1,800 per wet metric tonne (wmt) represented a steep 25 per cent decline from November’s price of 2,400 per wmt.
On a year-on-year basis, the December rate is 57 per cent lower, and which has got accentuated from the year-on-year fall of 45 per cent seen in last month’s selling price. NMDC also produces and sells iron ore fines the price of which stood unchanged, on a month-on-month basis, in December at Rs 1,560 per wmt, but which on a year-on-year basis now stands 49 per cent lower.
The company hopes that the latest steep cut will help it to stem falling sales even though the revenue realised per tonne will fall sharply. In the first half of the current financial year, FY16, from April to September, NMDC’s net sales dropped 48 per cent to Rs 3,407 crore, from the year-ago period. During this period, the miner’s profit after tax fell by the same rate, of 48 per cent, to Rs 1,820 crore.
Commodity analysts are not seriously surprised at the slash in iron ore lump price by NMDC saying it is in line with the trend in iron ore prices. Further, according to Ajay Srinivasan, director at Crisil Research, “increased domestic supply and subdued demand from the steel segment has also exerted pressure on domestic iron ore prices.”
Srinivasan expected further correction in the iron ore lump prices next year if the steel prices continued to remain under pressure.
In commodities, what is the end product for one company is quickly the raw material for another. Falling domestic iron ore prices should, theoretically, stand to benefit the steel manufacturing companies, but since it is the fall in demand from steel companies, which is causing the iron ore prices to fall the situation is rather complex.
“While the fall in domestic iron ore prices will impact the operating profitability of miners, the profitability of steel producers will not improve due to a corresponding decline of 16-18 per cent, year-on-year, in steel prices during January to November of this year. The decline in raw material prices will however, provide some respite to the steel players who could have seen a sharper decline in profit margins with the steep decline in price of finished products. We expect EBIDTA margin of steel players to decline by 800-900 bps y-o-y in 2015-16,” said Srinivasan.
Barring Jindal Saw, most of the other steel producers have seen their net sales decline in the first half of FY16. The next few months will be crucial for investors in how NMDC’s latest probably-unprecedented cut in iron ore prices plays out for itself and for large steel producers
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