Hindustan Zinc: Trade war concerns may keep base metal prices volatile

Hindustan Zinc saw an unusually weak June quarter, affected by lower-than-expected production and sequential decline in base metal prices. 

With the company gradually ramping up production, volumes are expected to pick up pace in the second half of the current fiscal. 

Metal production in the June quarter fell by 9 per cent year-on-year and 17 per cent, sequentially after closure of open-cast mining. Consequently, fixed costs were spread over lower production, which along with higher coal, diesel prices and wages compounded per tonne costs, thereby affecting profitability.  

The cost of production (COP) at Rs 69,907 ($1,043) increased 11 per cent year-on-year and 17 per cent sequentially. 

Sequential spike was sharper — thanks to maintenance /shutdown costs and 5-9 per cent sequential decline in zinc and lead prices on the London Metal Exchange (LME), owing to escalated trade war concerns. On year-on-year basis, however, zinc and lead prices on the LME averaged at $3,112 and $2,388 (up 20 per cent and 11 per cent, respectively), spelling some respite. Though the increase in costs was not unexpected, it was slightly higher than expectations.

Lower investment income on account of mark-to-market loss on debt investments as a result of higher interest rates further affected net profit, which at Rs 19.18 billion was lower than Rs 21.32 billion, consensus analyst estimates. The company, however, remains confident of its full-year guidance. “We are steadily increasing production from mines to fill the gap caused by closure of open-cast operation. As the year progresses, we will deliver record performance,” said Agnivesh Agarwal, chairman of Hindustan Zinc. 

While it expects to achieve its targeted 1.2 million tonne per annum (MTPA) production run-rate in the next few quarters, management is already planning for its next phase of expansion to 1.35 MTPA. The company also expects zinc COP to come down to $950-975 a tonne as expansions progress.

Though the zinc price outlook also remains positive given the continuing zinc deficit in 2018, near-term volatility in base metal prices on escalated trade war concerns may have a bearing on the Street sentiment.