India metals & mining - INR depreciation – Changing iron ore dynamics - Standard Chartered Securities

- The sharp 14% rupee depreciation in the past one month has given pricing power to Indian iron ore producers.

- While scrap prices have fallen in line with IER prediction in its SCout report published on June 9 June 2013, the steep rupee depreciation has resulted in the landed price of scrap increasing by c.10% in the past three months. Hence, contrary to IER prediction, iron ore producers (primarily lump producers) have regained pricing power.

- IER believe that despite weak demand, Indian lump/fines prices could rise going forward since the rupee depreciation has created a huge arbitrage in favour of local iron ore suppliers.

- Since June, scrap import prices have fallen by 6%, from USD 390/tonne to USD 370/tonne now. IER calculations indicate that given the current USD-INR exchange rate, it could stabilise at current levels.

- After a series of lump price cuts since January 2013, NMDC (NMDC IN, IL, PT INR 134.0) may hike prices in the next few months, in IER view.

Rupee depreciation changing domestic iron ore pricing dynamics

In IER's SCout report published on 9 June 2013, India metals & mining: Impact of the looming ferrous scrap glut, it argued that CFR India shredded scrap prices could fall to USD 356/tonne, implying that NMDC's iron ore lump prices could fall 22%. Nevertheless, since June CFR India shredded scrap prices have fallen by 6% to USD 370/tonne and iron ore lump prices have corrected by 10%. IER analysis was based on an USD-INR exchange rate of 54-55. With the 19% rupee depreciation since June 2013, the dynamics have changed. Although scrap import prices have fallen by 6%, the imposition of a 2.5% export duty and the 19% rupee depreciation have given pricing power to Indian iron ore producers in general and NMDC in particular. The equilibrium is due to (1) a depreciating rupee, (2) scrap prices and (3) the likelihood of a cut in the export tax rate to 20%. This implies Indian lump prices could snap its losing streak and rise in the next few months.

Source : Equity Bulls

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