With iron ore prices globally declining by more than 40% in November compared to a year ago, miners of the key steel-making raw material are expected to report a significant decline in sales and profit in the current fiscal compared with FY15. NMDC is expected to report 49% drop in sales to Rs 6,233.3 crore while its profit is expected to decline 50% in FY16 over the last fiscal, according to Motilal Oswal Securities.
Vedanta, which started exports of iron ore from October after a gap of three years due to mining ban, is unlikely to make profits owing to higher export taxes and significant dip in iron ore prices globally.
Iron ore prices touched a 9-year low to $38.5 on Thursday. The price collapse may extend to $20 a tonne range by 2017 or even sooner as a surplus in the export market continues to grow, according to a Bloomberg report.
The glut of seaborne iron ore is likely to rise by about 48 million tonnes (MT) in 2016 on cooling demand in China and as producers in Australia and Brazil continue to increase low cost supply. Prices are returning to average levels before China’s dramatic demand boom as it expanded to become the world’s second-largest economy, the Bloomberg report said.
In December NMDC has cut lump prices in the range between Rs 300 and Rs 1,800 per tonne without changing the fines prices.
“Globally the iron prices have declined by more than 50% from its peak and reports suggest that it may touch new low of $20. Margins will be severely impacted not only of NMDC but other producers as well if the price declines to such low levels,” a senior NMDC official told FE.
Sanjay Jain, an analyst at Motilal Oswal said, with the significant fall in iron ore prices it will be very difficult for the iron ore producers to maintain their profitability.
After a gap of more than three years, Vedanta sent its first iron ore shipment from Goa to China in October amid a slump in global iron ore prices and falling demand.
The prices of low-iron containing Goan ore are even lower at around $24.7 per tonne. Kishore Kumar, chief executive officer, Vedanta’s Iron Ore division, said, “many mine owners might resort to job cuts and closure of mines if the current higher tax regime and subdued price scenario continues.”
Analysts also said that even if Vedanta starts mining and exporting ore from Goa, it will not be profitable for the company due to a raft of taxes that are levied on mining companies in the state.
Mining in Goa attracts a 10% export duty on below 58% Fe grade iron ore, a 15% royalty paid to the state, a 5-15% levy in the form of a district mineral foundation tax and a 10% levy on the export price of iron ore under the Goa Mineral Ore Permanent Fund Scheme, according to a publicly available data shared by the Goa Mineral Ore Exporters’ Association (GMOEA).