Metals: the rising tide of prices
The risks to watch for are mainly whether China’s demand for metals will sustain , and whether developed economies continue with their easy money policy
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A steady trend prevailed in metal prices in the June quarter. Even as the macro assessment of weak global demand and excess capacity has not changed, the near term gave something to investors to be happy about.
Take steel. The government’s decision to throw a protective ring around domestic steel firms worked. The minimum import price continued all through the June quarter and has been extended. In addition, anti-dumping duties and quality standards for steel (applicable to imports, too) further stemmed imports. While these steps helped, globally, steel product prices rose, including in China. A ramp-up in domestic steel capacity, better efficiency and lower input costs were also seen during the quarter.
Companies such as Tata Steel Ltd and JSW Steel Ltd reported a significant jump in operating profits, chiefly due to an increase in domestic realizations. However, Tata Steel’s European business, too, did much better than expected. Thus, JSW reported an 84.7% increase in operating profit, while Tata Steel’s operating profit rose by 20.8%.
In the non-ferrous space, lower zinc output affected Hindustan Zinc Ltd’s results, although zinc prices rose sequentially by 14.2%. The firm expects output to recover in the second half of FY17. Aluminium prices and copper prices did not improve as much as zinc did. Hindalco Industries Ltd managed a significant improvement of 64% in its operating profit over a year ago, mainly because of lower input costs and stabilization of its new aluminium operations.
International seaborne iron-ore prices held on to the gains they saw early in the quarter, although they have been volatile due to pressure on China to cut its steel output, which can mean lower demand for iron ore. However, NMDC Ltd’s performance was affected as its domestic iron ore prices have been declining.
Since the beginning of the current fiscal, the S&P BSE Metal Index has risen by much more than the Sensex. Investors appear to be confident that the recovery in metal prices, underway since early 2016, is set to continue.
The near to medium term risks to watch for are mainly whether China’s demand for metals will sustain as its government continues to provide stimulus to growth, and whether developed economies continue with their easy money policy.