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| Metal surge to take wind out of companies' sails |
| Abhineet Kumar / Mumbai Aug 04, 2009, 00:49 IST |
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Steel and base metal prices have surged in the last three-four weeks as corporate results in the US have shown a sign of revival in the economy. The rise in metal prices is also going to end the party for companies that have been making high profits on the back of low raw material cost.
Hot Rolled Coil (HRC) steel import prices in the US have gained 36 per cent this month, while the prices for base metals such as aluminium, copper and zinc have risen 15-20 per cent in the last three weeks.
“These prices were quite beaten down,” said Alok Ranjan, fund manager at Way2Wealth Securities, a domestic brokerage house. “Corporate results in the US have shown a sign of recovery, which is now reviving metal prices,” he said.
Aluminium prices fell by 61 per cent to $1,251 per tonne on the London Metal Exchange (LME) in February from an all-time high of $3,271 about seven months ago. Similarly, Copper and Zinc prices fell by 68 per cent and 77 per cent, respectively, from their all-time highs of $8,900 per tonne and $4,603 per tonne.
In the US, where the impact of recession was felt the most, import prices for HRC steel fell by 70 per cent to $335 per tonne in June from a high of $1,137 per tonne in May last year.
“Liquidity in the market is improving and it is driving metal prices,” said a Hindalco executive, referring to the revival in global economy. HRC steel import prices gained 36 per cent to $455 per tonne last week from the low of $335 in the beginning of July. Aluminum prices reached $1,854 per tonne last week from $1,543 three weeks ago. Similarly, copper and zinc, respectively, traded at $5,604 and $1,685 per tonne against $4,857 and $1,469 three weeks ago.
Automobile and consumer durable industries are major users of metals. Depending on the product mix, metals — largely steel and aluminium — constitute 70 to 75 per cent of the net sales of auto and two-wheeler products. Owing to the fall in metal prices, this came down to about 65 per cent for the quarter ended 30 June.
“If the surge in metal prices sustains, then companies would report slightly lower margin,” said Piyush Parag, an analyst with Religare Securities.
“But that would reflect only after one or two quarters as companies purchase metals on three-six month contracts,” he said.
The rise in metal prices may not be an immediate concern, but auto makers do not rule out the possibility of raising product prices if it starts hitting their margins.
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