Two years of Covid: Metals get their shine back as demand fuels rally

When the world was upended by the Covid-19 pandemic, metals got their shine back.

In the last two years, demand spurred by infrastructure spending by major economies, energy transition and intermittent supply disruptions fuelled a scorching rally in metals after a downturn during the first Covid wave. Now, Russia’s war on Ukraine is ensuring that elevated prices stay the course.

According to CRISIL Research, base metals are currently at their highest levels since 2008, while steel prices in Europe are at an all-time high (in China, steel prices peaked in Q3CY2021). In the domestic market, both steel and base metals are at record levels.

Steel prices before the pandemic were hovering around Rs 40,000 a tonne in India. Prices dropped in H1FY21 as major end-users shut shop with the onset of the pandemic.

When economic activity finally started to resume steadily, H2FY21 saw prices surge to Rs 49,000-50,000 per tonne, said Hetal Gandhi, director, CRISIL Research.

But it wasn’t the end of the upside for steel prices, Gandhi pointed out. “2021 brought a convergence of elevated global prices, raw material cost push from iron ore and then coking coal, and healthy domestic demand growth. This pushed prices up again to Rs 65,000-67,000 per tonne in H1FY22,” she said. Prices however have scaled higher since to around Rs 74,000 per tonne.

For major base non-ferrous metals – such as aluminium, copper, zinc, nickel – the pandemic has been an inflection point on the back of supply constraints.

On the London Metal Exchange (LME), in FY21, aluminium prices were up 46.6 per cent, copper 77.9 per cent, zinc 48.1 per cent and nickel 40.1 per cent over the previous year. The rally has extended to FY22.

Debt reduction

Companies took advantage of improved margins to pare debt. Between March 2020 and September 2021, major steel producers, Tata Steel, Jindal Steel & Power, Steel Authority of India Ltd (SAIL) reduced debt by Rs 87,784 crore.

“The significant uptick in steel prices over the past two years has improved margins substantially for domestic steel makers. The improvement has been more pronounced among large players with integrated operations as increase in raw material prices (mainly iron ore) didn’t impact their bottom line as much,” said Gandhi.

The integrated steel producers also increased their share in production as smaller and secondary producers struggled with raw material shortages and working capital challenges.

In the larger metals play, Vedanta’s debt has come down since March 2020.

All-round expansion

Higher profitability and stronger balance-sheet prompted companies to push the growth pedal. In steel, Tata Steel, JSW Steel, JSPL, ArcelorMittal Nippon Steel India (AM/NS India), have announced massive expansion plans.

An ICRA report said that in the next five years (FY2022-FY2026), India’s steel capacity is likely to increase by 40 mt, almost double the quantum of capacity added during the previous five-year period spanning from FY2017-FY2021.

In non-ferrous, Vedanta Aluminium is expanding. “Our Balco (Bharat Aluminium Company) in Chhattisgarh is on track to double its capacity, our alumina refinery in Lanjigarh is slated to expand from 2 mtpa to 5 mtpa in the next 18-24 months. We are looking to operationalise a couple of our mines in the next financial year,” said Rahul Sharma, CEO – Aluminium Business, Vedanta.

“The last calendar year ended with an aluminium deficit of about 1.6 million tonnes globally, and this year, the deficit is expected to only grow. Our expansion plans are in line to cater to this opportunity,” Sharma added.

Across the board, non-ferrous players have announced capacity expansion, said Gandhi pointing to investment plans by Nalco, Hindalco and Vedanta (in copper).

Way forward

When India locked down and domestic demand was in a slump, metal producers – ferrous and non-ferrous – rode through it by increasing exports.“We made good of opportunities that were there in the world. Entire Europe was under the Covid wave (February-April 2020) while China was seeing a V-shaped recovery after the peak of pandemic. So, when India announced a lockdown, we became a large supplier to China,” said JSPL Managing Director V R Sharma.

Now, the Russia-Ukraine war is throwing up opportunities. Ranjan Dhar, chief marketing officer, AM/NS India, pointed out that the Indian steel industry has been able to position itself as a viable alternative in different geographies in the event of any supply disruptions – from production curbs by China to Russia-Ukraine war impacting steel trade.

“It is not just centrally located but the quality of steel is one of the best in the world today,” Dhar said.

Russia and Ukraine are major providers of steel to the world, accounting for 10 per cent of global steel trade. Russia also accounts for 6 per cent of aluminium production and that is an opportunity for low-cost domestic aluminium players.

But the steel sector may face headwinds, going forward. While rising steel prices and higher export opportunities from the Russia-Ukraine war were positives for Indian players, Jayanta Roy, ICRA senior vice president, pointed out, these positives were likely to be offset by rising coking coal prices and higher working capital requirements in business.

“Moreover, India's ability to capitalise on the opportunities in export markets will be capped by current high capacity utilisation rates of leading steel companies. Lastly, a demand slowdown induced by the rate tightening cycle by central banks would also be a risk in the medium term,” he said.