NMDC likely to benefit from rising pellet exports to China, says Incred Equities; retains 'add' rating

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NMDC, the country's largest iron ore producer, with a one-year target price of ₹319 apiece, as the brokerage believes that the company is in the sweet spot amid rising pellet export demand coming from China. The company's shares have been on a roll over the last 12 months, climbing from ₹104 apiece to the current level of ₹273, resulting in a multibagger gain of 162%. Also Read: Gold climbs 1% to two-week high on increased Fed rate cut expectationsThe brokerage highlighted several key factors impacting the steel and pellet markets.

It stated that high pollution levels in steel-producing regions and the unavailability of scrap in adequate quantity have made scrap more expensive compared to pellets. Pellet prices exhibit seasonality, as Chinese steel mills buy fewer pellets during the summer due to dust emissions during the sintering process but are forced to shift to pellets in the winter. Also Read: Nifty Auto vs Nifty Metal: Which sector should investors prefer?Currently, the pellet premium over iron ore is at a minimum level but is expected to revert to the mean value of US$0.50/t/% Fe content.

The brokerage projects that a 67% DRI grade pellet will trade near US$150/t over the long run.China's focus on scrap usage in electric arc furnaces led to a rapid increase in scrap usage. However, local scrap availability has stagnated, resulting in a fall in scrap usage in CY23. The decline in scrap exports from the Western world has not helped the situation for China.