Margin squeeze for galvanised steel makers

Rising zinc prices swell input costs

The gradual rise in global zinc prices is expected to squeeze the operating margins of galvanised steel producers, due to their inability to pass on the increased cost of production to consumers. Zinc is resistant to rust. So, it is used to coat steel for making lamp posts, car doors and beams. It is combined with copper to make brass. Two-thirds of its use is as an input for galvanising steel.

Zinc prices have moved up 21 per cent since April, on reports of the closure of mines. Spot zinc on the benchmark London Metal Exchange (LME) settled at $2,375 a tonne on Thursday, from $1,962 a tonne on April 1. Galvanised steel producers in India face a double problem. Lower demand from the infrastructure sector, the largest consumer of galvanised steel, has dampened overall business sentiment in this segment. Exports would also be hit, with global oversupply. “Therefore, our operating margins would remain under pressure,” said Ankit Miglani, deputy managing director of Uttam Galva Steels, the country’s largest galvanised steel producer.

“Zinc prices are trending higher, as supply is expected to move into a deficit due to closure of large mines, including Century and Lisheen in the next two years. Also, aiding a higher price is increasing cost of production due to increasing mine depths, difficult geography and stringent environmental regulations,” said Pavan Kaushik, Hindustan Zinc spokesperson.

Adding: The imminent mine supply gap is structural, with no major new mine expected to come online in the near-term. There is a requirement of about two million tonnes per annum of new capacity by the end of this decade but financing of new mine projects remains a big question mark. Therefore, a secular uptrend in zinc prices is likely in future, benefiting zinc producers like Hindustan Zinc.”

Mining companies are shutting key output facilities in Canada and Australia because reserves in those mines have largely been depleted.  New mining projects for zinc aren’t as large as those that recently closed.

“Just like we saw in nickel earlier in the year, commodity speculators have latched on to another base metal bull story, centered around the perception of emerging global deficits due to supply-side problems and an undercurrent of robust demand. In zinc’s case, LME stocks have been falling consistently for a long time but the closure of some major mines over the next year to 18 months is creating the perception that the market will tighten a lot further, extending the upside for prices, in theory,” said Andrew Cole, senior analyst at London-based Metal Bulletin Research.

Adding: “While fundamental changes might have triggered zinc’s rally, speculative momentum has taken over. We believe prices are overshooting on the upside now and are in the process of forming a spike, just as nickel did. They might get beyond $2,400/tonne, and possibly as far as $2,600/tonne, in a short space of time before coming down the other side. Provided the underlying fundamental improvement continues, however, prices should be able to resume their overall upward trend once the short-term spike has been corrected and consolidated or, in other words, once the hot money has moved on and the fundamentals can reassert themselves.”

Reflecting the supply squeeze, zinc inventory LME-registered warehouses declined to 654,950 tonnes on Thursday, compared to 833,575 tonnes on April 1. Spot premiums have more than doubled in the past year, to $220 a tonne.

Uttam Galva, in which ArcelorMittal bought a 35 per cent stake in 2009, has reported a 50 per cent decline in net profit to Rs 27.5 crore, following a 13.2 per cent decline in turnover at Rs 5,440 crore in 2013-14.

Apart from Uttam Galva, Jindal Steel also produces galvanized steel in significant volume.