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NMDC had been forced to cut iron ore prices in FY16 in line with falling iron ore prices, with iron ore lumps (more remunerative compared to fines) feeling the pain. Photo: Aniruddha Chowdhury/Mint

It’s a good time for the government to contemplate an offer for sale (OFS) in NMDC Ltd. Its main source of income is from mining and selling iron ore, whose prices have risen sharply in international markets. In December, seaborne iron ore prices imported into China had fallen to below $40 a tonne, from $67 a tonne a year ago, with some analysts expecting them to fall further. Prices recovered since March, and after some ups and downs, have crossed $70 a tonne.

 

Since a substantial part of mining costs are fixed, an increase in prices of this magnitude flows to profits. NMDC had been forced to cut iron ore prices in FY16 in line with falling iron ore prices, with iron ore lumps (more remunerative compared to fines) feeling the pain. In February 2016, prices of lumps were lower by 41% compared to April 2015, while that of fines was down by 20.4%.

 

 

Since then, things have looked up. As of 4 April, the price of lumps is up by 16.7% and that of fines by 19.2%. The sharp uptick also reflects the fact that domestic steel production has stabilized after the government’s measures to limit imports. The main risk at present is if the iron ore price rise unravels.

 

An increase in steel production in China has resulted in higher demand although there are questions on whether Chinese production will hit a wall some time soon. Global steel demand is still weak. Mills in the steel producing Tangshan region may also be stocking up, as they may have to curtail output during a six-month period for an international flower exhibition. That may mean lower demand for iron ore later. All of these are threats to iron ore prices.

 

Till some of these factors come into play, iron ore prices are coasting along on strong tailwinds and its share has risen by 25% since end-February.

 

That could see the OFS fetch a good price even at a discount. The government plans to sell about 10%, which amounts to Rs.3,960 crore at current prices. The short-term scenario looks upbeat compared to some months ago, but the underlying problems confronting the global steel industry remain and may weigh on investors’ minds as they contemplate the offer.