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Metals: Chinese recovery a big positive

Domestic steel producers may benefit from uptick in global prices, but base metals show no sign of recovery

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India’s companies have been in the doldrums since the beginning of this financial year — the Bombay Stock Exchange (BSE) Metals index is down 5.5 per cent, while the Sensitive Index (Sensex) is up 10 per cent since April. The tide may be turning as there is an pick-up in industrial activity across the globe, especially in China. Aggregate demand in China is showing signs of recovery, if the purchasing managers’ index (PMI) is any indication.

In October and November, the index has sustained over the sentimentally critical level of 50. In September, China’s was 49.8. The reason behind China’s increased appetite for raw materials is not only a mild recovery in export orders, but also an uptick in domestic demand. This is good news as China is one of the biggest consumers of metals, and analysts are expecting a mild rally. Besides, global PMIs are also showing signs of an uptick.

The impact of Chinese demand for metals is visible in the global steel production levels. Global crude steel production in October grew 1.3 per cent year-on-year (y-o-y) to 126 million tonne (mt), driven largely by a six per cent uptick in China’s crude steel production to 59.1 mt. Although capacity utilisation remains weak on a month-on-month basis, crude steel production in the first 10 months of 2012 is up 0.7 per cent to 1,276 mt. With the exception of Europe and India, steel prices have moved up across most economies.

Analysts at Religare say: “With domestic demand showing no signs of a pick-up post the monsoon season, inventory levels for continue to remain high. However, a provided support to domestic steel prices.”

Analysts say the prices of iron ore and coking coal have also stabilised, as the underlying demand remains weak. This will be beneficial for Indian steel players struggling with high raw material prices. In the ferrous metals space, analysts say Tata Steel remains attractive, as it is expected to benefit from improved volumes thanks to its capacity expansion. The performance of its European operations would also show an improvement as benefits of lower raw material costs kick in.

However, the outlook for base metals is not as optimistic. Prices of aluminium, for instance, are expected to hover between $1,900 and $2,100, as demand outstrips supply. It is the same story for copper and zinc as well. Zinc supplies are expected to be in surplus through 2013. Analysts prefer Hindustan Zinc more for its silver play than anything else, which is expected to double to 450 tonne a year by 2014. Base metal prices could remain capped till there is a genuine uptick in global growth.

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