Metals: good times are here, but will they last?
The good run for Indian metal companies continued in the March quarter. Realizations in both steel and non-ferrous sectors trended up, volume growth was steady, and together they contributed to good sales and profit growth. Aluminium ended the quarter with a gain of 15% from the start, with zinc posting a 9.9% gain and copper gained 6% on the London Metal Exchange. On the flip side, a sharp increase in coal costs undid some of the benefits from higher realizations.
China’s stated intention of closing down polluting and illegal steel and aluminium units has been one of the main drivers of metal prices, along with hopes that infrastructure growth in the US will drive consumption. The uncertain nature of these events and their impact on actual production and consumption has also made price movements volatile.
Steel companies put up a good show during the quarter. Tata Steel Ltd’s average steel realizations rose 8% sequentially and its revenue rose 21%, on the back of higher volumes. While India has been a main contributor to its performance, Europe did very well this quarter with the region’s Ebitda/tonne doubling sequentially. Ebitda is earnings before interest, taxes, depreciation and amortization.
In JSW Steel Ltd’s case, its sales rose 18.2% sequentially but Ebitda rose by a lower 8.7% due to higher raw material prices. Non-ferrous companies such as Vedanta Ltd and Hindalco Industries Ltd also benefited from higher output and realizations, which they are utilizing to lower their debt.
One main concern for the industry is the relatively low domestic demand situation. Steel companies have seen their output soar but have been exporting their surplus output as domestic demand is not growing at the same pace. While consumer industries such as automobiles and durables have seen a pick-up in demand, infrastructure and construction sectors are lagging. Metal prices, too, are showing signs of strain which has made investors nervous; the BSE Metal Index is down 3.8% since early April.