The Indian metals sector is set to report a good performance in the March quarter on the back of higher prices and sales. In steel, Tata Steel Ltd was quick off the block to announce its domestic volume numbers for the fourth quarter (Q4). Its steel sales rose by 6% sequentially and by 16.8% over a year ago. JSW Steel Ltd’s crude steel output was also up by 6% sequentially and by 28% over a year ago. New steel capacity is chiefly responsible for higher sales. Other large integrated steel makers too are likely to report good growth during the quarter.
Since domestic consumption has not kept pace with rising capacity, steel is being exported at a time when prices are increasing. A recent note by Fitch Ratings said steel prices have risen by about 10% since end-November. Steel prices are being supported by higher iron ore and coking coal prices. Thus, while sales growth of Indian companies is likely to increase, rising input costs are a risk to profitability. However, this is partly mitigated by captive sourcing and inventory purchased at lower prices.
Average iron ore prices, of imported ore delivered at Qingdao in China, are up by 18.7% in the March quarter, over the December quarter. But prices have weakened towards the end of the quarter. They are at $79.4/tonne, compared to a high of $94.9/tonne seen in February 2017. The worry in the market is that China’s crackdown on polluting steel capacity may see a slowdown in demand for iron ore, while supplies continue to increase. China’s steel output in February did decline sequentially and if that trend continues, that could become a real risk.
In the non-ferrous market, rising prices bear good news. Compared to 3 January, copper prices are up by 4.4%, zinc by 7.1% and aluminium by 14.3%. Higher copper prices should benefit Hindustan Copper Ltd but only if it manages to ramp up output. The treatment and refining charges appear to be under some pressure, which is not good news for the custom smelting operations of Hindalco Industries Ltd and Vedanta Ltd. An 8 March Reuters report had said these charges had hit a four-year low in the spot market, chiefly due to scarcity of concentrate supplies due to mining shutdowns.
The aluminium side of the business, however, appears to be in good form. While aluminium prices have risen, metal premiums too have improved. A 31 March Reuters report said Japanese aluminium premiums have risen to $128/tonne for June quarter deliveries, compared to $95/tonne in the March quarter. That’s a sharp increase and if aluminium prices continue to rise or even sustain current levels, domestic companies should see sales and profitability improve. Similarly, on the zinc front too, the increase in prices should see better realizations for domestic producer Hindustan Zinc Ltd, which has said that the March quarter output will be higher than in the preceding quarter.
While the March quarter is expected to be good, slow growth in domestic investment demand is a worry. Rising metal prices in fiscal year 2017 (FY17) meant companies benefited even if they did nothing. The outlook on prices in FY18 depends to some extent on whether real demand improves and also whether China’s measures to lower pollution actually result in lower output in sectors such as steel and aluminium. If higher output elsewhere makes up for supply cuts, then prices could struggle to sustain the uptrend.