Metal cos’ sheen far from reviving
Premium- Higher commodity prices at the start of Q1 would translate into a hike in metal cos’ realizations
- However, a rise in input costs will affect Q1 margins. Also, a price decline would lower margins in Q2
In the past week, the Nifty Metal index has gained 3.6%, beating the Nifty50 index, which has risen 1.6%. News reports indicated that China plans a stimulus of $220 billion by advancing bond sales due in January. There is an anticipation that this will increase infrastructure spending and boost commodities. There is also some optimism around reports citing sources that the Indian government may reconsider the export duty levied on steel.
Amid weak demand, domestic hot-rolled coil prices have fallen by almost 14% since the export duty was levied on steel effective 22 May, according to SteelMint data. Therefore, the potential removal of export duty on steel will be a primary trigger for shares of steel manufacturers, many of which have hit 52-week lows in the past two months. Note that shares of many metal companies had scaled to new 52-week highs in March-April, with commodity prices such as steel and aluminium escalating because of the Russia-Ukraine war.
View Full Image
Hereon, the demand outlook is likely to be muted. Monsoon in India will mean a halt in construction activities, translating into lower demand. Globally, demand for metals is expected to be softer because of the tightening of the interest rate cycle and recurring lockdowns in China, a key consumer.
In the June quarter (Q1FY23), though, there was some saving grace as commodity prices were high at the beginning. “The steel price surge witnessed in April is likely to ensure realizations edge higher by ₹2,000-3,000 per tonne in Q1FY23 despite the significant correction in steel prices in May-June," JM Financial Institutional Securities analysts said in a report on 7 July.
However, this increase in realization will be more than offset by elevated input costs, affecting profit margins. Though coking coal prices started to decline from May end, it will reflect in the financials with a lag. Earnings before interest, tax, depreciation and amortization (Ebitda) per tonne of steel companies in Q1 is likely to fall by ₹3,000-4,000 quarter-on-quarter, according to JM Financial analysts. Export duty on steel will hurt volumes. Tata Steel India’s Q1 delivery volumes fell by 2% year-on-year and 21% sequentially. Its European operations are doing better relatively, which makes Tata Steel better placed among steel companies.
In the case of aluminium, falling prices on the London Metal Exchange, along with higher input costs, such as that of thermal coal, will lead to a sequential drop in consolidated Ebitda for Hindalco Industries in Q1. “We expect Ebitda/tonne of ferrous companies to be the lowest in the past eight quarters, potentially leading to earnings downgrade by Street. In the case of non-ferrous companies, we expect volumes to sustain, but margins are likely to slip owing to higher coal cost," said Edelweiss Securities in a report on 6 July.
MINT PREMIUM See All
Thermal coal costs remain high, but the average price of coking coal in July so far has declined by 52% from the average seen in March, according to CoalMint. “Moderation in global coking coal prices should have a more pronounced effect on costs in Q3FY23. For aluminium companies, Chinese production and exports will remain key and determine spreads for companies excluding China," said Satyadeep Jain, an analyst at Ambit Capital. However, things are likely to worsen before starting to get better. “Earnings in Q2FY23 are likely to be worse than Q1FY23 for most steel companies, primarily because price declines should more than offset a moderation in coking coal consumption cost. Q2 is also a seasonally weak quarter, especially for long steel," Jain said.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less