India's NMDC Announces Provisional Iron Ore Price Hike Despite Global Decline in Commodity Prices

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Researched by Industrial Info Resources (Sugar Land, Texas)--Rana Som, Chairman of India's state-run NMDC Limited (BSE:526371) (Hyderabad, Andhra Pradesh), recently announced that the long-term prices of two grades of iron ore would be provisionally increased. The increased prices will be backdated to April 1, the beginning of the current financial year. NMDC's domestic customers will now have to pay 10.5% more for its iron ore fines and 33% more for most of its iron ore lumps. About 1% of NMDC's sales are accounted for by a special grade of iron ore lump, which has gone up in price by about 40%. Iron ore fines, which make up 55% of NMDC's domestic sales, are a powdery raw material that is made into pellets before being used in blast furnaces. Iron ore lumps, on the other hand, do not need much processing and can be used directly in blast furnaces.

However, global prices of steel and other commodities are declining, and NMDC is in a tight spot. Domestic steel producers have expressed concerns over the prices and are ready to begin negotiations to lower them. The higher prices will raise steel-making costs by $22 to $30 per ton, which will have to be passed on to customers. Such a move could ruin the government's efforts to rein in steel prices. Steel producers are already being affected by the high cost of steel manufacture and the growing demand for lower product prices. Further, private mine owners have reduced iron ore prices significantly.

While NMDC's fines are sold at about $40 per ton, privately run mines have dropped their prices to about $20 per ton. NMDC's other iron ore grades are priced at similarly higher rates compared with prices quoted by private miners. In view of the global rates, NMDC may announce a rollback of its provisional price hike within the next few weeks, although it has said that the proposed price hike is a measure to insulate the company from short-term market fluctuations. NMDC has also said that the price hike was a part of the agreement with its customers.

NMDC's prices are usually based on those quoted by global mining players, and its long-term prices usually hold for the complete financial year. However, market conditions may require prices to be increased or decreased at other times, too. NMDC produces about 15% of India's iron ore and it operates three mines: one in the state of Karnataka and two in Chhattisgarh. A few of NMDC's domestic long-term customers are Essar Steel (Mumbai, Maharashtra), Ispat Industries (BSE:500305) (Mumbai), JSW Steel Limited (BSE:500228) (Mumbai), Vikram Ispat (Mumbai), Rashtriya Ispat Nigam Limited (Visakhapatnam, Andhra Pradesh), and a number of smaller companies.

Despite the displeasure of domestic customers, NMDC's hiked rates are much lower than those announced by other global majors. Vale (NYSE:RIO) (Rio de Janeiro, Brazil) has increased its prices by 71% for its Chinese customers while Rio Tinto (NYSE:RTP) (London) has raised its prices by 96% for its Japanese customers.

China's largest trading association, the China Chamber of Commerce of Metals, Minerals, and Chemicals Importers and Exporters (Beijing), recently released data that showed the average reference cost, insurance and freight prices for Indian iron ore grading 63.5% hovered between $90 per ton and $95 per ton over the week beginning October 6. This was $13 lower than the cost, insurance and freight prices over the week beginning September 22. The practice of incorporating a reference price is to regulate the trading of Indian iron ore in China's domestic market to avoid any conjecture. Indian and Chinese iron ores are traded in China's iron ore spot market, which is the largest in the world. Many small and medium steel firms depend on Indian spot iron ore to run their industries.

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