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NMDC appoints KPMG to help it devise iron ore pricing formula

KPMG was chosen from among six consultants which bid for the job, and a pricing mechanism is expected to come into force from Jan 2013.

, ET Bureau|
Nov 16, 2012, 05.04 AM IST
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India's largest iron-ore producer has appointed KPMG to help it devise a pricing formula for the mineral after complaints by steel companies that NMDC is overcharging them.
India's largest iron-ore producer has appointed KPMG to help it devise a pricing formula for the mineral after complaints by steel companies that NMDC is overcharging them.

HYDERABAD: India's largest iron-ore producer has appointed KPMG to help it devise a pricing formula for the mineral after complaints by steel companies that NMDC is overcharging them.

KPMG was chosen from among six consultants which bid for the job, and a pricing mechanism is expected to come into force from January 2013, a person with direct knowledge of the development said.

The adoption of a stable pricing method will allay the concerns of steelmakers who say that ore prices have remained high in India, contrary to the global trend. In addition, because of the crackdown on illegal mining, availability of iron ore has also become a problem. The raw material accounts for a quarter of steelmaking costs.

NMDC has never settled on a stable pricing formula, confounding its buyers. It set monthly prices for October and November, dropping rates twice in succession. But it set rates for a three-month period between July and September, raising prices by up to 13%. Ironically, spot prices of the benchmark 62% ferrous grade fell from $149 a tonne in April to around $100 in September. Prices have risen by around 20% since October.

"Sometimes we followed international pricing and sometimes domestic demand-based pricing. Most of the pricing formulae we adopted were not welcomed by our customers," a senior NMDC official said on the condition of anonymity.

KPMG declined to comment.

NMDC, which sells almost entirely to the domestic steel industry, aims to increase iron ore production to 40 million tonnes by 2014-15 from 27 million tonnes now and further to 50 million tonnes by 2020. During the six months to September, it sold 12.7 million tonnes of iron ore, compared to 14.4 million tonnes in the year-ago period. For the September quarter, turnover fell by 15% to 2,612 crore, and net profit declined by 14% to 1,679 crore.

The NMDC stock fell 4.23% to 169.90 on the Bombay Stock Exchange on Thursday.

NMDC is headed by acting chairman C S Verma, who is also the chairman of Steel Authority of India. In September, he seemed to be chastising steelmakers when he told NMDC shareholders that steel companies protest whenever there is a trend of a rise in iron ore prices, but when ore prices begin to go down they go silent. Bhavesh Chouhan, an analyst at Angel Broking, said a stable and market-linked pricing model should help NMDC's customers plan their budgets efficiently. "The pricing models that NMDC adopted so far were quite erratic. The advice of a professional agency should help it have a more stable model, linking it to the global market prices."

The pricing method that NMDC adopts at present is ostensibly linked to the prevailing rate for iron ore in the domestic market. Before that, it was the Platts Index. The abrupt shift to a domestic-price-linked method was perceived by NMDC's customers as heavily skewed to benefit the iron ore producer. They have been campaigning for linking prices to the Platts Index. State-owned steel producer Rashtriya Ispat Nigam recently urged the union steel ministry to ask NMDC to lower prices saying its margins were coming under severe stress.

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