Amid global worries, domestic demand some cushion for metal companies

The metals markets have seen turmoil since the Ukraine War started in February 2022. Initially, the fear of supply disruption led to a spike in prices, then prices moderated quite substantially as demand slid on global economic weakness. While global weakness continues, the worry now is China, where rolling lockdowns have been followed by slower growth and deflation.

Domestic demand was hit to some extent by seasonal weakness but it is expected to recover as the infrastructure component of the Budget kicks in. Global growth is showing continued weakness and China remains a question mark: Will the People’s Bank of China continue to deliver a monetary stimulus to support a weak real estate sector? It appears to be the case and this has led to some optimism despite no visibility yet where more activity is concerned. 

Global price trends in iron and steel continue to be bearish but global production is also contracting, which could mean a new equilibrium in supply and demand. As such, steel producers are expected to see continuing margin contraction and seasonal weakness could lead to lower volumes. Coal prices have risen to some extent but there’s greater availability of thermal coal, which means that Coal India’s e-auction prices for non-power sector consumers may be at lesser premiums. This could set a cap on raw material costs.

Sequentially, margins are expected to contract in the first quarter (Q1) of 2023-24 financial year (FY24) versus Q4 FY23. Domestic crude steel production has been flat month-on-month (MoM) through Q1FY24 and up slightly year-on-year (YoY). Hot-rolled coil (HRC) prices have fallen through Q1FY24 and long steel products saw a significant price dip in June 2023 with cancellations of export orders. Domestic iron ore prices were cut in June by NMDC, but China and Australia ore prices have risen. 

Trends in other non-ferrous metals are less clear with lead having seen an upwards spike in price while aluminium, copper and zinc may be close to sustainable bottoms in price. Aluminium and zinc are likely to see sequential decline in realisations in Q1FY24 versus Q4FY23. However, where Hindalco is concerned, Novelis could see margin improvement to offset Hindalco’s lower margins.

China’s position as the world’s largest exporter of metals as well as a huge domestic consumer makes it a key player. But base effects caused by lockdowns in 2023 make it hard to judge the extent of recovery in China’s domestic demand as well as in metals production. China’s steel exports fell in June2023 versus May2023. If real estate sector weakness persists in China, there could be further production cuts across the industrial metals space.

Most analysts remain positive on a demand pickup in Q2FY24 as the construction and infrastructure thrust should drive demand as the monsoon eases off. The share prices of Jindal Steel and Power Limited (JSPL), JSW Steel, and APL Apollo Tubes have shown strength, especially the latter due to expectations that earnings before interest, taxes, depreciation, and amortisation (Ebitda) will rise on higher volumes. Hindalco has traded sideways since July 2022. NMDC could see better Ebitda due to higher sales volumes and lower royalty payments offsetting lower realisations. Coal India may see a fall in Ebitda YoY in Q1 due to lower e-auction prices. Stresses on Tata Steel Europe operations remain a cause of concern for the Tata Steel stock.